How to Start Building for Retirement When You're Young

Okay my friends, this is for every 20-something you love. I can guarantee you they aren’t thinking about their retirement, but this is exactly the age when they can give themselves a huge leg up on retirement. They just might need you to help them realize that.

I say that even though you and I both know it is ridiculous to think that just when someone is launching into adulthood they should focus on retirement. But that’s what our retirement system requires.

Making one smart choice in their 20s will set them up for success. Waiting until their 30s (or 40s) to focus means a harder slog.

So here’s the clear, concise message  I want you to share with all 20-somethings in your life:

All they need to do is nail one key number: 15%. Their goal in their 20s should be to save 15% of their income in a retirement account.

That can be through a workplace retirement plan, or their own Individual Retirement Account (IRA). In both instances, encourage them to use a Roth, not a Traditional account. Most 401(k)s now offer a Roth option, and I am confident that someone in their early 20s meets the income limits for contributing to a Roth IRA.

The 15% savings rate is based on a lot of smart people doing a lot of mind-numbing number-crunching that factors in how investments grow over time, how much of our work-years income we need to live comfortably in retirement, and how much other income sources, such as Social Security will provide.

Someone who starts saving 15% of their income by age 25 and keeps at it, will be in good shape decades from now.  Wait until 35 or 45 to get focused on retirement saving means having to save a lot more to land in retirement in solid shape.  While 15% can seem like a big ask for today, my hope is that you can help young adults in your life see that it is an act of financial self-care that will make their lives easier in the coming decades.

Now comes the question of how to pull it off. My advice is that they just dive in cold. That is, commit to automatically saving 15% of their income ASAP. The faster this becomes a habit, the easier it is to pull off.

We’re all susceptible to lifestyle creep: as income increases it’s all too common to just spend more, rather than save more. By anchoring your financial life early to a goal of saving 15% of your income for retirement, you are defending against lifestyle creep. That 15% saving commitment becomes your automated priority that comes before spending.

Now, of course, you also need to spend on essentials: rent, food, etc. But here too I am going to insist that the 15% savings for retirement gets prioritized.

Then you right-size your spending around that. If that means renting a less expensive place, that’s the right trade-off. If that means eating in a bit more than eating out, that’s the right tradeoff. If that means focusing more on needs vs. wants, that’s the right tradeoff.

And most importantly, making a 15% savings rate an early adulthood goal should not be seen as a punishment or a drag. I hope you can help 20-somethings in your life see the potential for it to be liberating and empowering. It’s a choice that in itself (saving for retirement) and in its spillover effect (causing more intentional spending choices today) will deliver financial security. How can you not want that?