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7 Ways to Prepare for Retirement in Your 20s

Joe Udo

The year you get your first full time job is the best time to start saving for your retirement. The power of compound interest will have much more time to work in your favor if you start investing as soon as you start making some money. However, most people in their 20s are way too busy to think about retirement.

Most of us have experienced the starving student lifestyle, and it was not fun. When your first paycheck rolled in, I'm sure you had a list of things to spend it on. Young people these days also have large student loans to contend with, and it's difficult to find any extra money to put toward retirement. I'm sure most new college graduates who just started a new job are not ready to even think of retirement. Most young people are focused on working and enjoying that money when they can.

Here are seven things 20-somethings can do to get ahead:

1. Avoid consumer debt. It's difficult to avoid debt at any age, but it's worth the effort to start out right. While young people often live in the moment and enjoy going out and having a good time, it is very important to spend less than you earn so you can avoid credit card debt. The interest will chip away at your income, and it will be much more difficult to save if you take on more debt.

2. Avoid lifestyle inflation. Most of us are unable to avoid lifestyle inflation after we start making more money. Who wants to drive an old jalopy around when a car dealer is offering a new car with a low interest rate? Spending money is fun and our consumer culture encourages that. However, it's difficult to reduce monthly expenses once they creep up. It's best to avoid lifestyle inflation as much as possible.

3. Grow your income. People in their 20s do not make as much money as older folks, but their compensation has a lot of room to grow. If you work hard, you should be able to get promoted and grow your income quite a bit early on in your career.

4. Sign up for a 401(k) account and start saving. A 401(k) account is a great retirement savings tool. Everyone should sign up even before their first paycheck rolls in if they can. That way your 401(k) contribution is automatically deducted from your paycheck and you won't see that amount in your checking account. This will help with lifestyle inflation because if you don't see the money, you won't be tempted to spend it. Start contributing right away and then increase this amount a little bit every year until you reach the contribution limit.

5. Open a Roth IRA. The best time to contribute to a Roth IRA is when you are in a low income tax bracket. The money invested in a Roth IRA is after tax, but you won't have to pay tax on any earnings.

6. Open a taxable brokerage account. It can be difficult to max out a 401(k) and Roth IRA. If you have any money left over after doing these two things, then consider opening a stock brokerage account. Investing in the stock market can be daunting when you are new to it, but you can start by investing in a low fee index fund. Once you learn more about investing, then you can branch out.

7. Buy income producing assets instead of a new car or other stuff that will break. Think about depreciation before spending money. If you buy a new car, it will be worth much less in a year. If you buy some dividend stocks instead, you will receive dividend income and the stocks might gain in value. Another example of an income producing asset is a house. You can buy a house and rent out some rooms to generate income to help pay the mortgage.

It's not easy to think about retirement when you are in your 20s, but your older self will be very grateful if you do so.

Joe Udo is planning an exit strategy from his corporate job by reducing expenses and increasing passive income. He blogs about his journey to early retirement at Retire by 40.

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