We had some visitors this weekend. My brother, his wife, and her two brothers dropped by for a quick visit on their way to Vancouver, BC. It was great to see them and they had a great time playing with baby RB40. We talked about bit about my leaving the workforce and Matt asked what advice I can give a young guy in his early 20s.
I told him to save up as much as he can in his 401(k) account. The 401(k) is a great retirement saving vehicle and everyone should take advantage of it. Here are just some of the advantages of the 401(k) account.
- Tax-deferred – You don’t have to pay tax on your 401(k) contribution. We need all the tax savings we can get. This will enable the 401(k) account to grow much faster than an equivalent taxable account.
- Employer matching – Many employers have a matching program and this is a part of your total compensation. You are leaving money on the table if you don’t contribute enough to receive the entire employer matching.
- Automatic deduction – Once you are signed up for the 401(k), the contribution will be automatically deducted from your paycheck. This is a great way to save because if you don’t see the money in your checking account, you won’t be tempted to spend it.
- You can take it with you – If you leave your company or move to a foreign country, you can rollover your 401(k) into an IRA (individual retirement account.) You won’t lose this investment when you change employers.
When I started working, I didn’t want to save for retirement, but my dad convinced me to contribute to my company’s 401(k) program. Talk to anyone right out of college and retirement will be the last thing on their mind, but this is the essential time to start saving for retirement. The earlier you start saving, the more time your investment will have to grow. Time is your best friend when it comes to investing because of compound interest. Every year, your interest will be added to your investment and it will generate more interest next year.
We didn’t talk long about 401(k), but I hope Matt will be able to put aside some money for retirement. He is changing jobs and saving might be difficult for a while. Most people in their 20s are still not settled down and they have many obstacles to saving. It is fun to spend money and young people live in the moment more than older folks. Who wants to think about retirement, when you are tearing up the town on the weekends?
Saving for retirement is a great habit to build when you are young. It will teach you to spend less than you earn. This is the single most important thing to learn about personal finance. I guess I should have told Matt this instead, but he will figure it out by himself if he contributes to his 401(k) account. In a few years, his 401(k) account should grow without impacting his lifestyle too much. He’ll see that saving and investing is an effective way to build his net worth.
What would be your advice to Matt and other people in their 20s? If you are in your 20s, what is preventing you from maximizing your 401(k) contribution? The max contribution amount is $17,000 for 2012. I guess that is somewhat high if you are making less than $70,000.
Update: There was only so much you say in 15 minutes and this subject needs a lot more time than that. That’s why I’m starting a new series on advice for young folks.
- Say no to debt
- Minimize Lifestyle Inflation
- Growing Your Income Is Essential
- Start investing as early as possible
- Your Retirement Account Options
photo credit: flicker Suicine. I couldn’t find quite the right photo for this post. I’ll do a little more work tomorrow.