When you are in your 20s, retirement seems like a faraway event that you do not need to worry about now. Many 20-somethings focus on starting their lives by finishing school, starting a new job, purchasing a car and simply getting started with adult life. They tend to place other financial priorities above saving for retirement. However, those who start saving at a young age will gain more benefits, like compounding interest, and have far more savings than those who wait.
Here are a few tips for retirement planning in your 20s:
Get Educated – Learn about your CalSTRS or CalPERS retirement benefits. It is important to know that your CalSTRS or CalPERS benefits will not replace your entire pre-retirement salary. The average retirement payout for a CalSTRS or CalPERS member is 60-70 percent of pre-retirement salary. Most CalSTRS and CalPERS members are accustomed to living on 85-90 percent of their pre-tax salary before retirement. This percentage is estimated because of mandatory contributions to CalSTRS, union dues, and 403b or 457 contributions. The 20-30 percent income loss at retirement is known as the Income Gap. It is the difference between what you were earning before retirement (85-90 percent) and what the pension will pay you in retirement (60-70 percent). That is why it is important to supplement your pension with a voluntary plan like a 403(b) or 457. The 403(b) or 457 plans will help offset the Income Gap.
Sign Up for a 403(b) or 457 Retirement Savings Plan – Tax-exempt entities like schools, colleges and government entities are able to offer 403(b) retirement plans. It is strictly a voluntary program which allows employees to make pre-tax contributions in the form of a payroll deduction. The tax is deferred until withdrawal after retirement. 457 retirement plans are similar, but allow access to the funds at a younger age. You can also make after-tax contributions to both plans.
Save a Little, But Save Often – In your 20s it is likely you may be living paycheck to paycheck. However, it is important to try and save a little from each paycheck you receive. Saving a little over a long period of time will put you in a better position than someone who starts saving later in life. Experts suggest saving 10 percent of your income during your 20s. As you age, this percentage will grow with your paycheck. It is important to put as much savings into your 403(b) or 457 plan as possible.
Avoid Debt – It is estimated that the average 20-something has more than $5,100 in credit card debt, not to mention student loans. It is important to work hard and get yourself out of debt as quickly as possible. Once out of debt, live within your means so you can avoid debt in the future and put more of your income into savings.