If you’re in your 20s, you may likely not even be thinking about retirement yet. This is especially true if you’re uncertain about the type of career you want to pursue, even after graduating college, and/or if you have student loans to pay off. However, it can be highly beneficial to start investment planning before turning 30 because although you may not have much money, you do have something just as valuable: time. Here are some reasons why you should start investment planning in your 20s.
Why Starting Investment Planning In Your 20’s Is Ideal
It’s wise to begin planning for retirement before you’re 30 because:
You have fewer responsibilities
Generally speaking, you have fewer responsibilities in your 20s, especially in your early and mid-20s. At this age, most people don’t yet have children or a mortgage. Therefore, it’s a good idea to take advantage of this time by starting your investment plans. If you’re still living with your parents in your 20s, you can save even more money because you don’t have to pay expenses like rent and groceries yet.
Compound Interest
You also may have a better sense of your overall life goals (financial, personal, etc.) in your 20s. Even if you don’t know all of your objectives, however, it may be helpful to enlist the help of a financial advisor. This type of professional can help you understand compound interest, which is also an excellent reason to begin early retirement planning. Compound interest is a type of interest on a deposit or loan that’s calculated based on the principal and any interest previously accumulated. Thus, compound interest allows your money to grow exponentially.
Furthermore, some life events (and/or when they will occur) are unpredictable. However, try to consider the following factors when you’re doing your retirement planning:
- Your current age
- The age you intend to retire at
- Current and future expenses
- The sum you wish to set aside for retirement
- Where you intend to live after retirement
- Current or future savings accounts
- You and your family’s health history (for Medicare and other key late-life medical insurance coverage)
Individual Retirement Accounts
Individual retirement accounts (IRAs) are also a great way to plan your future investments. There are two different types of IRAs: traditional and Roth. With the former, you can allot pre-tax income to investments that may grow tax-deferred. Contributions to a regular IRA can be tax-deductible. Nevertheless, there is one notable downside to traditional IRAs: the required minimum distribution (RMD). This means that once you turn 72, you’ll need to withdraw a specific amount annually and pay income taxes on this sum.
Meanwhile, a Roth IRA allows you to make tax-exempt withdrawals under certain conditions. Unlike traditional IRAs, contributions to Roth IRAs aren’t tax-deductible. However, the funds you receive upon withdrawing money are tax-free. An experienced financial advisor can help you determine whether a traditional or Roth IRA is the best option for you. If you can get a 401(k) through your employer, don’t hesitate to choose this before opening an IRA, especially if your organization matches your contributions.
Savings Accounts
In addition to an IRA, it’s also an excellent idea to invest in a savings account. You can open this type of account at your local bank, which likely won’t offer you a good rate. However, a savings account typically allows you to withdraw and deposit any sum of money whenever you please. Savings accounts also don’t carry tax deduction benefits, which means any interest you earn on your savings is taxed in the year it was earned.
For all these reasons, it’s extremely wise to start investment planning in your 20s. Of course, be sure to always stay aware of factors such as market risk (especially for stocks) when planning for retirement. Certain events may be out of your control, but you have the ability to decide your tolerance for risk.
Speak To The Retirement Planning Experts
Reach out to the professionals at Inflection Advisors to learn more about the many benefits of investment planning for retirement in your 20s. Regardless of your financial history or current situation, the field you work in, or what your objectives are, our team is dedicated to caring for your economic well-being. Our five-step process for ongoing financial growth begins with a data collection phase, and then continues with stages devoted to analysis, recommendations, and implementation before ending with regular monitoring (e.g. monthly or quarterly planning meetings or investment updates) to ensure you’re on track to achieve your goals.
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