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Financial Considerations For Those Starting Out In Their 20s

| July 27, 2021

By Kristi De Rycke, Registered Assistant

You have the world at your feet.  You have finished all of the schooling that was required and have a job that is starting to pay real money.  Nice work!  By now you have also discovered how expensive it is just to live…. rent, car payments and medical insurance.  Why would you possibly save money for retirement now?  You have plenty of years ahead of you for that.  That is true, but if you were walking down the sidewalk and saw a $20 bill laying on the ground would you pick it up?  Now envision a pile of $20 bills in front of you on the sidewalk.  Would you take 5 minutes to stop, pick them up and stuff them in your pocket?  Of course, you would!  If your company offers a 401K plan, they most likely offer a match.  This is FREE money!  Typically, if you put in 3% or so, they will match it at 50 or 100%.  So, if you put in $50 per pay period and they offer a 100% match then they add an additional $50.  Now you have just started saving $100 in each pay period for your retirement. 

Hmmm…that sounds like a lot of money right now.  I understand that.  The nice thing about a 401K or traditional IRA is that it is taken out pretax.  If you are single and make less than $40,525, your highest tax rate is 12%.  What does that mean?  That means that the government would have taken $6 out of that $50 per pay check anyways.  They can’t get that $6 if you put it in a 401K or IRA.  So, that means you are down to only $44 of real money that comes out of your pocket to get $100 to go into your retirement account with each paycheck.  The way to trick ourselves into not missing the $44 as much is to have it automatically invested in each paycheck so it is gone before we can spend it.  Your HR department can help you set up these automatic contributions, so you aren’t walking by the pile of money on the sidewalk.  If you are self-employed you can set up a traditional IRA for the same benefit.

Now what about the argument that $50 per paycheck is not going to make a dent in retirement savings so why bother until you get more pay raises.  You have a superpower right now that will not always be with you: TIME (AKA youth).  The money you save now will compound on itself and grow.  If you don’t really understand the details of this, know that you don’t have to.  Go to any online compound interest calculator (I used  Type in $50 as current principal.  Put the $2600 annual additions (your $50 plus company $50 x 26 paychecks).  Now the hard part is assuming what the annual interest rate is.  The performance of the stock market varies and is unknown in advance.  Let us assume 5% annual growth.  Any guesses how much that $44 per paycheck would be worth with the match?  $330,135 in 40 years!  Not a bad dent in retirement!  What if the market produced the 8% average.  $728,516!!!  Wow!  That would give you some retirement options!  So what if you just waited 10 years down the road when you had a little more income.  That $2600 per year for 30 years at 8% would only be $318,602 and at 5% would only be $181,594.

You may be thinking that you took a job as a starter job but it isn’t going to be your forever job.  No big deal.  You can roll your 401K into an IRA that you will always have control over.  You can manage this by yourself or with a financial advisor.

Have you ever heard of the app Aging Booth?  You take a picture of yourself now and it will transform it into how you may look older.  I had heard about this app one Saturday morning.  I transformed everyone’s pictures from our website.  I was laughing to the point of tears.  I emailed the rest of the Johnson team with their old look alike picture so that would be one of the first emails they opened.  Talk about a way to start a Monday!  We all had a good laugh over them.  Try it on one of your pictures.  Think about how much you want to be nice to the person that may be looking back at you in the mirror someday.  If you can find a way to start saving for retirement now you can open up options for that older version of you.  You may want to retire early.  You may want to change to a less demanding job that may pay less.  You may want to travel once your family is raised.  The options and decisions will all be yours!

By Greg Johnson

Time in the market not timing of the market will make the biggest difference in your retirement success or failure. Kristi is spot on with her advice above. I tell our clients to take advantage of free money like a company retirement match when given the opportunity. It amazes me to this day seeing the clients we started working with when I first started who contributed $50 or $100 per month into accounts and what they have saved for their retirement. Funny thing is once you get started you hardly ever miss the money you are saving, and you keep increasing the amount of money you are contributing. It all adds up so get started today.

Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Past performance is no guarantee of future results. Material presented is meant for general illustration and/or informational purposes only. Please note that individual situations can vary.  Therefore, the information should be relied upon when coordinated with individual professional advice.