Retirement Planning Advice for My 20-Something Son

CBS MoneyWatch

"Hey, Dad! You should write about the steps I should take for retirement." This advice came recently from my 29-year old son, who started his career a few years ago and will soon become a father. "Should I save money for retirement, a down payment on a house, or for my kid's college education?"

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"Yes" is my short answer to his question, but let's dig a little deeper to find out why.

The challenge facing most people in their 20s and 30s is juggling competing priorities — usually there isn't enough money in the budget to do it all. So how do you prioritize?

You might be surprised to hear that I don't think saving and investing for retirement should have the highest priority on a list of the retirement planning steps you should take when you're in this age range. Here's what's more important:

Invest in your career. If you don't make much money, or are in a declining industry with the threat of layoffs, it's hard to invest much money for retirement. So your first priority is to establish yourself in a successful career that has a future.

Build your nest. It's a great time to be a first-time home buyer, with low home prices and low mortgage rates. Consider saving for a down payment, provided you live in an area that doesn't have economic challenges, like Las Vegas, Detroit, or Florida. But don't fall into the common trap of buying that large, fancy house to impress your friends; buy just enough house to meet your needs.

Establish smart spending habits. Live like you're poor. How do you do that? Drive your cars into the ground, don't eat out very much, avoid expensive and potentially unhealthy processed foods, buy food in bulk, buy just enough clothes to fit your needs, and use public transportation. Resist the temptation to go overboard on lessons or activities for your children or electronic gizmos in the house. Use credit cards only as a convenience to avoid carrying cash; limit your credit card spending so that you can easily pay off the balance each month. Make every dollar count with your spending, so you can free up money to invest in the future.

Get healthy. One of the best things you can do for your retirement years is to establish lifelong, healthy, eating and exercise habits. Doing so won't increase your spending, but it will go a long way to preventing the depletion of your financial resources in your retirement years due to high bills for medical and long-term care expenses.

When it comes to balancing saving priorities, here are a few thoughts:

Set your targets on good public schools for your kids' college education. There's no need to bankrupt your retirement so your kids can go to an expensive private college. This actually does your kids a big favor, since you won't need to move in with them when you're retired because you've spent money that could have gone to your retirement on their college tuition.

Save at least 10 percent of your pay for your retirement. This includes any match you might get from your employer. For example, suppose your employer matches dollar for dollar on the first four percent of pay for your contributions. In this case, you'll need to save six percent of your pay — four percent to get the four percent match, plus two percent to get up to 10 percent. Save this amount for 30 or more years, and you'll most likely get in the ballpark of having accumulated enough money for retirement. If you've got the time or patience, it would be better to use an online retirement planning calculator to get a more accurate estimate your savings needs. Invest your retirement savings in a good target date fund, unless you have the time and skill to learn about investing and constantly monitor your investments.

To wrap up my list of suggestions for my twenty-something son, here are a few closing thoughts I shared with him:

Prepare to retire at age 70. By the time you retire, it's inevitable that Social Security's retirement age will be pushed back. And if you've taken care of your health, there's a good chance you'll live to 95, so retiring at 70 could still give you a 25-year retirement.

Participate in a traditional pension plan, if you can. Most likely this won't be possible unless you work for a government entity or a union, but if a pension plan is available, it can go a long way toward improving your retirement security.

Put some money away in a Health Saving Account (HSA). These are becoming increasingly popular with large employers. If you have access to one, resist the temptation to spend the money each year on current medical bills; instead, keep it invested in the HSA so it can grow as a resource for you to use in your retirement years for the inevitable medical bills that will crop up.

Invest time with your children. It's very helpful to have good relationships with successful children who can provide emotional, logistical, and maybe even financial support in your retirement years. Make sure you do all you can to nourish that relationship.

While the action steps I've outlined are much easier said than done, I do believe they are entirely achievable if you put in the time and effort. Take these action steps, and you and your children will live long and prosper!

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