What is the Best Retirement Plan for Young Adults?

How much should young adults save for retirement? At some point, your savings will be enough to support your basic monthly expenses. That's your number.

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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 a $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 $1,400 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 strategy. If you're wondering what makes a good retirement plan, learn from my experience.

Best Retirement Plan for Young Adults

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.

When young adults like me are thinking of investing for the next 50 years 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.

Over time, the 1 or 2 percent fee charged by money managers really compounds into 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 Do 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 Empower's retirement planning 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 to stop before the million.


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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.

Ways to Prepare for Retirement

Still need more advice? Here are some tips for early retirement for young adults.

1. Start Saving Now

If young adults have one thing on their side, it’s the gift of time. However, too many people take this for granted, when they should be seizing the initiative and building their pension fund from the earliest possible age.

“In simple terms, this type of proactive approach affords investors more time to build their wealth while minimizing the amount that they need to save on a monthly basis.”

This is especially beneficial in the current economic climate, where inflation remains far higher than earnings growth.

For Millennials, the key is to ensure that they opt-in to their workplace retirement plan, while also seeking out money-saving apps, savings accounts or investments that could deliver the highest returns over a period of years.

2. Seek out Professional Advice

When you’re focused on saving money, you can often lose sight of other factors such as the repayment of debt and your overall quality of life.

This is why Millennials need to create an integrated and holistic financial plan for their future, and one that factors in an array of different considerations and the transition between various life stages.

To achieve this, it’s important to seek out professional and actionable advice from financial advisors.

“Financial advisors can offer a comprehensive financial plan based on your circumstances, while also building incrementally towards your retirement.”

This will require a financial commitment, but this is likely to pale in comparison to the potential returns.

3. Minimize the Cost of Living

We’ve already touched upon the importance of maintaining a good standard of living, but this does not mean that you cannot minimize your monthly expenditure and optimize the amount committed to savings.

“The key here is to focus on recurring costs that can be reduced gradually over time, without compromising on your access to food, entertainment and utilities. These small but frequent savings accumulate over time, maximizing the amount of income left at your disposal.”

This will require a disciplined and focused mindset, but one that can really yield results in relation to your financial future. Or you can use price drop apps to help you find savings.

This strategy is certainly preferable to eliminating all big-ticket purchases, which are usually one-off items of expenditure that do not impact on your ability to save consistently.

So while you should always give consideration to your spending when trying to save, do not rule out funding holidays or buying a new car automatically.

4. Finally Learning Those Financial Terms

According to research that was conducted by Pew Research in 2011 and 2012, about 27% of adults ages 18-22 admit feeling “not too” or “not at all” confident that they will have adequate financial resources — through income and available assets — to last them through their retirement years.

A major step in preparing adequate retirement strategies is simply informing yourself by reading highly rated personal finance books and learn some of the key terms in financial savings. These may include IRA’s, 401(k)s, and an understanding of assets — particularly as they apply to your own individual financial situation.

What is an IRA?

An Individual Retirement Account (IRA) is just one of the common terms tossed around in discussions of retirement strategy. As a type of savings account – available in the forms of a ROTH IRA, deductible IRAs, and nondeductible IRAS – IRAs are designed to help individuals save for their retirements while also offering tax advantages along the way. These can be set up at your bank, through an investment firm, or through an insurance company. Any person that receives or earns income is eligible to start an IRA account, and you will often see doing so as one of the top recommended steps when beginning your retirement planning.

What is a 401(k)?

Briefly, a 401(k) is a savings plan for retirement sponsored by an individual’s employer. With 401(k) benefits from your employer, a portion of your paychecks will be specially set aside for you 401(k), which allows for the gradual accumulation of savings over time. The money distributed into the plan is done so before taxes are taken out. Originally, the plan was designed to give individuals control over how their money is invested, and specific policies within the 401(k) plan may vary by employer.

What are Assets?

Assets generally refer to the items an individual owns that have value. These may be ordinary objects such as a refrigerator or a set of vinyls, or they may be your owned stocks, land/property, cash, and other investments. Assets increase your net worth. An investment strategy that particularly applies to retirement savings is asset allocation, which involves the balance of risk and reward through the shifting of assets according to the needs of certain investments and investors. I use Empower to monitor my net worth and it's completely free.

5. Every Little Bit Helps

One important thing to remember in executing smart retirement strategy — particularly if you are in your 20’s and just beginning the process — is that every little bit you can save helps. Retirement savings are supposed to be the accumulation of money over time that will be able to finance you in your later years.

Forbes recommends that people in the 20’s stash 10% of their income, increasing that percentage to 20-35% in subsequent decades of your life.”

Saving a little and saving often ensures that you won’t find yourself in a pinch later on in life. This is one game of procrastination that you most certainly don’t want to play.

6. Create (And Stick To) A Budget

Particularly if you’re not transporting your income by the truckload, creating a budget for your spending is another responsible way you can allocate some money for your retirement savings.

“If you have already dealt with student debt or have otherwise created budgets in the past for food, transportation, and other expenses, the same idea can be applied to retirement savings as well.”

Organizing your finances can be key to ensuring you establish a legitimate, worthwhile savings plan for retirement.

All in all, although your initial impression might be that your initial years of decades – your own roaring 20’s – are too early to necessitate retirement savings strategies, experts and increasingly publicizing that that is indeed not true.

Starting your savings plan young is increasingly recommended by financial experts, and can only be beneficial for you long-term to ensure your comfort in your older years.

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.

About the author

We are Mr. and Mrs. Xyz from Canada. We share our thoughts on http://www.ourfinancialpath.com 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.