What’s the point of saving for retirement in your 20s?
My 19-year-old sister and I are roommates in Boston, and despite my best efforts to not be a Dad, I’m certainly acting like ours. I’m on a mission to convince her to start saving for her retirement. Talking about retirement is peak Dad mode. I see it. I get it. I can hear myself. Or rather, I can hear our Dad, saying, “Make sure you’re saving.”
But she’s skeptical, and full of logical questions, like: “Seriously, why do I need another savings account?”
My preferred investment vehicle is an Individual Retirement Account (IRA) — it’s a savings account made through a financial institution that builds interest over time and is taxed either when you add funds (a Roth IRA) or withdraw at retirement (a traditional IRA). Unlike your typical 401(k), these accounts aren’t tied to an employer, and the average percentage rate of returns fluctuates anywhere between 5% and 12% over a lifetime. (That’s much higher than the typical savings account interest rate of about .06%.)
Wait, what is “interest” and why is it so important?
“Learn from my mistakes,” I tell her. By the time I took the plunge, I was 26 (I’m 28 now) — meaning I’d missed out on a few years of collecting interest on my own money. “Do you want to have to work into your old age? What if you get sick and can’t work? What if you want to retire early?”
But my sister is philosophical. She starts in with the existential questions: “Isn’t it true that you can’t access that money until you’re in your 50s? Will we even live that long? What’s the point?”
This question is tougher for me to answer coherently. She thinks she’ll die young, and throwing money into an account she doesn’t think she’ll ever use seems kind of pointless.
“What are you even saving for?” she asks.
What’s the use in having money that you can’t access readily when you may need it the most now? Is it safe to trust financial institutions during an economic recession? Is retiring really realistic anymore, with so much student loan debt, the high cost of health care and rising housing costs?
I needed help answering these questions, so I brought them to an expert: Megan Leonhardt, a senior money writer for CNBC. Here’s what I learned from our conversation.
IS IT TRUE THAT IF I PUT MY MONEY INTO AN IRA, I WON’T BE ABLE TO ACCESS IT UNTIL I’M IN MY 50S?
Your money isn’t untouchable. When you contribute to an IRA, your money isn’t locked away in some unattainable place. It’s not as easy to access as your checking account, but it is accessible.
I know that experts say “Don’t touch your retirement savings,” but there are a lot of exceptions where you can actually use that money if you run into real problems. It’s not locked up forever. Yes, you will have to pay some penalties, depending on how you’re using it, but if you need that money, it’s there, and it could be a safety net.
The penalty is a 10% fee if you withdraw before age 59-and-a-half, but there are a few penalty-free exceptions. It’s also worth noting that if you use a Roth IRA, you can withdraw any contributions from it at any time, penalty free.
WILL I EVEN LIVE TO SEE THAT MONEY?
If you’re worried that you won’t live to see your funds, consider using a will to designate your money to a cause you believe in, should the worst happen too soon.
Certainly, naming family and friends as beneficiaries is a good option too — but no matter the outlet for your money, it’s good to know that if you don’t live to see your retirement funds, someone else will.
CAN I ACTUALLY TRUST FINANCIAL INSTITUTIONS?
Yes, but do your homework. We feel the repercussions of financial problems when they hit. The 2008 recession was 12 years ago, but those who lived through it don’t struggle to remember it. Banks were bailed out by the taxpayers, yet it feels like some Wall Street CEOS still got bonuses while retirement funds disappeared.
A healthy amount of skepticism is really crucial to have, because it forces you to make sure that you’re understanding everything and also protecting yourself.
These institutions have millions of customers, and unless you’re paying for a financial planner’s help, you’re on your own. If a financial planner meets with you, take their card and do some digging. Read up on the companies. No institution is perfect, and if you see complaints against them, look for patterns.
These financial institutions all have their own controversies. If there is a pattern of deception or unethical practices, steer clear. And you can also call them directly with questions.
WHERE DO I START?
The sooner you start saving, the bigger your financial gains. Of course, life can get in the way, and doing your research takes time. But if you need help getting started, you can turn to a financial planner, adviser, or coach.
I obviously realize that we’re all busy individuals, and sometimes the best path isn’t always the one you take. Still, it’s better to do something rather than nothing.
SAVING?
If you need the money to survive today, then hold off on saving. If you’re struggling to pay for your necessary costs, it’s OK to recognize that you might not be in the best financial situation to put money away. I think it is perfectly fine to say, “At this point, I need to pay for the things that I need to survive today.”
But if you do have disposable income, make sure some of it goes to retirement. It doesn’t have to be all of it, but it shouldn’t be none of it.
IN CONCLUSION
After talking with Megan, I tried to relay her points to my sister, but she didn’t really care. And I totally empathize with that. The world is very different now. We are still living through a pandemic, and the future is uncertain. Tomorrow is uncertain. But my sister still has time. I just hope she doesn’t wait as long as I did to start.