Retirement planning: should you do it in your 20s?
Retirement may seem like a long way off when you’re in your 20s, but planning for the future at this time can have enormous benefits—especially when you consider the compounding effect of interest, and the many opportunities available for young investors today.
Investing early means you can take advantage of the time you have in the market to build your wealth and reap the rewards when the time finally comes for you to retire.
However, when considering your financial future, it’s a good idea to weigh up the pros and cons before you start planning to ensure you’re making the right decision. Let’s go over some of the advantages and disadvantages of retirement planning in your 20s:
The pros of retirement planning in your 20s
- Long-term focus yields greater results.
- You may be in a position to take on more risk.
- You can make small contributions.
1. Long-term focus yields greater results.
Few forces have as big an impact on your investments as time—and as a millennial, time is on your side. The longer the investment period, the greater the effect of compound interest and market growth.
According to MoneySmart, compound interest is “interest paid on the initial principal as well as the accumulated interest on money you have borrowed or invested. You earn interest on the money you deposit, and on the interest you have already earned.” This means that over time, your initial investment combined with interest earned will grow exponentially.
Time allows you to ride out market fluctuations and volatility so that you can benefit from the compounding returns and dividends. Many investors go by the belief that there's no ideal time to invest, except for a long time.
2. You may be in a position to take on more risk.
While everyone’s situation is different, your 20s tend to be a more flexible period of your life where you may not have dependents living with you, or other financial responsibilities. This makes it the perfect time to start putting money away for your retirement.
3. You can make small contributions.
Many people still mistakenly believe that all investments must start with a large sum of money. But the truth is, you can start with something as small as $20-50 per week.
Even if your financial circumstances are not ideal, saving a couple hundred dollars per month can make a big difference in the long-term when you take into account compound interest. As you get older, you may need to make larger contributions but for now, small contributions are a great starting point for building wealth.
As time goes on and you learn more about investing, you can choose to move this money around rather than just letting it sit in a savings account. The bottom line is, the earlier you start the more options you will have later on.
The cons of retirement planning in your 20s
- You may have less income to invest.
- The problem with counting your chickens.
- The degree of sacrifice that comes with investing.
While planning for your future is a positive thing, it’s still a good idea to consider all the factors behind any financial decision that you make. Let’s look at some of the downsides of investing this early:
1. You may have less income to invest.
Even if you don’t have a mortgage or a family to support, typically your income level in your 20s is far less than later in life when you have built on years of experience. If you already struggle financially, you may not be in an ideal financial situation to be putting money away for the future, especially when that future is still many decades away.
You may not want to put yourself under further strain by giving up what you don’t have and then relying on loans just to get by.
Unfortunately, being financially literate is not an intuitive practice for many people, which is why learning more about how to manage your finances will help you make better decisions regarding your income and future financial goals.
2. The problem with counting your chickens.
Nothing is a sure thing. You may have heard the saying, “don’t count your chickens before they’re hatched”—and this is certainly true when you’re talking about investing.
Compound interest is based on the idea that you can invest a little over time and that it will eventually build up to a comfortable retirement. However, the effectiveness of compound interest is eroded by factors such as fees, inflation, taxes and market performance.
When people reach the age of retirement, they may find that they have less than what they thought they would have, because the cost of living has increased along with the fees and taxes they have had to pay over the years.
3. The degree of sacrifice that comes with investing.
Most of us spend our 20s navigating the exciting new territory of adulthood and enjoying our new found freedom. This may be the first time you get to truly enjoy the money you have worked hard to earn, and you may want to travel with friends or have new experiences that were previously beyond your reach.
Investing in your future at this time may mean giving up certain experiences such as holidays, or dining out at nice restaurants so that you can put this money back into your investments for the future.
If you’re more present-oriented rather than future-oriented, this can be a difficult practice to keep up. Some of us may not be willing to forfeit these experiences just to hopefully have some money many years down the line.
Interested in pursuing finance?
At the end of the day, the decision to plan for your retirement requires careful consideration of your present situation and future financial goals. No matter what your investment plans are, it’s a good idea to arm yourself with the right knowledge.
Upskilled offers flexible online courses in Finance, such as the FNS50615 - Diploma of Financial Planning or the FNS50315 - Diploma of Finance and Mortgage Broking Management. You can study from home at your own pace and start your course anytime.
Find out more by chatting to one of Upskilled’s education consultants and start your dream career in finance today.
This article should not be taken as expert financial advice. Please consult a financial specialist for further advice on your circumstances.
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