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What is the Best Retirement Plan for Young Adults?

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With high savings rates and long-term investing, I’m planning to retire in less than 10 years with a portfolio large enough to sustain my family’s lifestyle thereafter. I figured out what the best retirement plan for young adults later on in my life. I bought my first stock at 23 years old in my campus apartment, it was some Toronto-Dominion Bank stocks and I sold them the second I made $100 profit off of them. I did not know what I was doing and I was aiming the short-term gains. As soon as it hit my target, I sold.

Looking back at this trade, I would now be $1400 up if I had not sold so soon. Here is the thing with the market, things take time and the real gains will come with a long-term plan. If you’re wondering what makes a good retirement plan, learn from my experience.

What is a good retirement plan?

Learn to invest for the long term

I have since learned a lot about the ups and downs of the market and now solely invest in index funds to diversify risk and take a long-term approach to investing. Selecting individual stocks was just too much of a gamble for me. Even the professionals cannot beat the index over the long-term. 

Nearly 89% of actively managed funds underperformed their benchmarks over the past five years and 82% did the same over the last decade, S&P said. CNNMoney.

The best retirement plan for young adults

When young adults like me are thinking of investing for the next 50 year or so, missing out on a few basis points can really hurt down the line. Not only is it statistically improbable that actively managed funds beat the market but they also charge a lot more fees.

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Over time, the 1 or 2 percent fee charged by money managers really compound to large sums. For example, if we compare a passive index fund with a 0.15% management fee to a 1% management fee active fund; paying that 0.85% difference would have diminished your earnings by 20% over the next 20 years.

Bottom line: Simply invest in total market index funds and at a certain point, we can simply coast and relax.

How much you need to save for retirement

We do not all need 1 million dollars to be happy and isn’t this the ultimate goal; to be happy? At some point, your savings will be enough to support your basic expenses many options will come to you.

Let’s say you live a nice middle-class lifestyle with a few frugal tricks here and there and you are able to live off $40,000 per year. The traditional amount to safely retire off your investments, according to the Trinity study, would be $1,000,000 invested in a 75% stocks and 25% bonds portfolio.

Even going back a century and testing your portfolio with the Monte Carlo simulation offered in Personal Capital’s retirement tool will give you a high rate of success with such a nest egg. However, you might not want to work that long and would prefer stopping before the million.

Be flexible

That’s where you need to be flexible. If you have been diligently investing for a while, you can always slow down before the ultimate “retirement” if you are flexible.

Some people take mini-retirement every few years where they work for 5 years than spend a whole year off before going back.

Some others cut their hours to part-time work or have side-hustles to sustain part of their expenses.

Choose the best retirement accounts

Next, you’ll want to make sure you have the best retirement account for your situation. Here are seven types of retirement savings accounts to consider:

  1. 401(k) or 403(b) Offered By Your Employer. Tip: Likely a 401(k) plan is the easiest and best place to start investing for retirement.
  2. Solo 401(k)
  3. SEP IRA
  4. Simple IRA
  5. IRA
  6. Roth IRA
  7. Health savings account.

If you need help finding the right retirement account for you, consider using this IRA guide.

The final word

All this to say; there is more than one way to achieve financial freedom but whatever your path, start working on it today.

If you have not started saving yet, start today with automatic transfers and, once you are ready, start investing and make your money work for you.

I wish you great success in your journey.

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We are Mr. and Mrs. Xyz from Canada. We share our thoughts on about personal finance, investments, and frugality with the ultimate goal of financial independence. We are aiming to retire at 35 and show you exactly how we do it.

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