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Retirement Saving: From $0 to $1 Million on $30,000 a Year

Ah, retirement. If you’re square in the crosshairs of our Money Under 30  demographic, then “Money After 65″ is all you can think about, right?

We didn’t think so. But the facts are beyond dispute for anyone who wants to accumulate wealth over time: Retiring in your 60s with a million dollars or more largely depends on how much money you put away starting in your 20s or 30s.

Of course, other forces may call us as young adults: traveling, pub crawls, or a sports car that does 0-60 in $40,000. Or we might find ourselves — to quote a recent popular post – young, broke and single. At either extreme, we may indulge the kind of magical thinking that sees us hitting the lottery or launching a multi-million dollar tech startup in six months or less.

Still, the law of compound interest applies just as much as the law of gravity, and those who help young adults build wealth have some definite views on the subject. Money Under 30 spoke with Holly Kylen, a financial advisor and retirement coach at ING. In a male-dominated finance world, she’s also the co-author of the “Retirement Planning for Women Seminar” with ING Financial Partners. Here are her tips for recent college grads and young adults hoping to get retirement planning off on the right foot.

1. Practice the 80/20 rule 

“Put 80 percent of your income towards living expenses and any other spending needs,” Kylen says. As for the remaining 20 percent, “That goes right into retirement savings.”

And yup, she said 20 percent.

Kylen cites the example of a 20-year-old grad making $30,000, saving 20 percent annually to yield $6,000 a year. By maintaining this savings level of $6,000 for 45 years to age 65 , with an annual compound interest of 5 percent, guess what the grad winds up with? $1,037,868, thanks to the magic of compound interest.

“Students in the young adult financial education classes I teach every summer are always amazed and inspired by this figure,” she says. “And it doesn’t even account for likely increases in contributions during those 45 years of working as your salary increases.” So there: Kylen just showed you how to become a millionaire. (You might want to send her a Starbucks card as a thank you.)

2. Start your Roth 

In a Roth IRA, earnings grow tax-free because the money you put in is after-tax dollars — as opposed to a traditional IRA or 401(k) which are pre-tax. Kylen favors the Roth, which she says offers flexibility as well: “The amount you contribute is liquid after one year and can be tapped for emergencies, while up to $10,000 can be accessed without penalty for education expenses or a first-time home purchase. You should however, try as best you can to avoid touching that money until retirement.”

Read more: Where to open your first IRA.

3. Treat financial education like a college course 

If you think one course in Economics taught you all you’ll ever need to know about finance, guess again. “Financial education is a lifelong pursuit, so your studies should continue in your post-grad life,” Kylen says. She recommends reading a financial magazine and at least one financial book annually.

“The best way to feel in control of your finances is to educate yourself on key concepts, such as asset allocation, differences between Roth and traditional IRAs, and your employer retirement plan options and matching contributions.” We especially concur with that last statement; if an employer matches your IRA contribution, that’s like free money to safeguard your future.

4. Know your budget — and live by it

Raise your hand if you have a daily, monthly and/or yearly budget mapped out. While we’d hope to see all hands go up, we won’t shame you if you didn’t raise yours — though Kylen says now’s the time to apply the same precision to money that you might to oil changes on you car, or building you iPod playlist.

“After putting away 20 percent of your money into retirement savings, consider 50 percent of your income for necessities — such as rent, transportation and food — and the remainder for other financial goals and ‘play.’” The budget should act like a compass, guiding you through major financial commitments and decisions before you have to make them. That includes “getting your own apartment, accepting employment positions, purchasing a car or heading off on a post-graduation European vacation,” she says. Hey, a budget beats using the Magic 8 Ball.

Read more: The easy way to budget for people who hate budgets.

5. Be goal-oriented 

You had a goal to graduate college, and congrats if you made it. You had a goal to land a job, and thumbs up if you cleared that hurdle. Now, apply that same moxie to your savings ambitions. “Set one-year, five-year and ‘don’t-touch-until-retirement’ goals,” Kylen says. “For your one-year goal you might aim to save $500 for holiday gifts, while a five-year goal might be to purchase a car loan free.”

To hit these various targets, “figure out how much you need to put aside each month to reach that goal and set up an automatic transfer into a separate savings account.” This we heartily endorse, because the money that’s easiest to invest — and that usually eludes wasteful spending — is the money you don’t see or stuff into your wallet. Consider direct deposit of a paycheck followed by automatic transfers into your retirement and savings accounts.

It’s tempting to put off the “adult world” of retirement for a time when it’s more convenient. You may feel like you’ve earned a rest from all such responsibilities after putting in so much time at school or your job. And it’s true to some extent that time is on your side when you’re under 30. But it’s even more so on your side when you set modest retirement savings goals at a young age, and follow through on them. Compound interest, consistency and careful planning should do the rest.

About Lou Carlozo

Based in Chicago, Lou Carlozo is a personal finance contributor for Reuters Money, a columnist with DealNews.com, and a former managing editor at AOL's WalletPop.com. Contact him with story ideas for Money Under 30 at feedbacker@aol.com, or follow him via LinkedIn and Twitter (@LouCarlozo63).

Comments

  1. Luck also helps. At 40, with a MA, I gave up on trying to save money, get a good job, and just decided I’d travel, live within my meager means, and enjoy my life first and foremost. So, I started working contract jobs, and learned that many of these arrangements are unorganized. I got good at what I was doing, organized it through myself (clients came directly to me), homogenized the process (made it predictable), and communicated well with clients.

    I am 47 now and will have that million soon — this year in fact. There was nothing magical about it, but I took advantage of one fact: when you have a contract as a contractor, satisfied clients don’t care what you’re doing with your free time or how much other clients are paying you. Unlike a traditional ‘employment’ relationship, they feel no sense of ownership over you. If you are predictable in your client’s eyes and your work is done on time with no errors, in other words if you solve someone’s problem through what you do, no one will care. It helps if you can do this online (I have not met, ever, 90% of my clients). The one skill I have is a foreign language. Everything else was learned on the way, and luck gave me my initial kick.

    I write this to say that there are many ways to a million and that it can be done in a short time in some cases. My situation is not unique nor is my position over niche-y. China needs what I do, and others will stumble in and make their money too. I plan to retire by 50.

    also wrote what I wrote because some of you under-30s will, like I did, get through your 30s, have your BA, have your job, have your car, and think: is this it? Am I to sit here until I am 65? Some of you will do the math and realize that you’ll only just barely make it to a retirement at all, and that’s if everything goes as planned — when does that happen over the course of a 40 yr career or life?

    Don’t waste your youth. You only have one. Don’t take your good health for granted when you’re young. You won’t be able to climb all the way up to the top of the dome at the Vatican AFTER you get that golden watch. You’ll need an oxygen tank and you’ll regret it.

    Finally, I wanted to say that the promise companies make to youth these days has not kept up with inflation – in other words companies are paying less and less in exchange for your entire working life! At some point over the last few decades that amount crossed a line of value for many people, though this happened so gradually that inertia carried many graduates right into the work world despite it’s grim outcome and despite the very low value you get in exchange for your youth and all the energy and drive you have at that stage of your life. A long time ago, you were paid what was an exciting amount that allowed one income to raise a family and the company offered a generous retirement package and other benefits. Now, there is more stress and less promise. Even if you get that job, higher taxes higher prices, and fewer promises can make it bleak once you finally sit down in your cubicle and stare at your screen. They don’t let you moonlight — as you’ve traded all that in.

    • Victoria says:

      I agree with BillyBob on many points, but not everyone has great business ideas and can figure out how to start a profitable business. Being a woman, I tend to avoid risk, so my path is a typical path of a hardworker- long hours, dediaction to the finnacial services company, and school on the weekend. I am getting tired of this meaningless life. In fact, I have no life. I cannot find time to work out, or even read a book I want to read ( read college books), do not remember when I was out last time enjoying myself. The only time I go out for a dinner in NYC is when my coworkers and I really need to vent about our mean managers/bosses. People became disposable, and everyone lives in fear of being fired one day (probably specifics of financial industry). I envy those who run their own successfull businesses and plan their on time. That has been my dream for at least 5 years (I just turned 30), and I have been looking for an idea but not successful so far. I feel that I am wasting my youth on work and school, but I have to go through this. I do have one solid skill- knowledge of a foreign language, but can’t see how I can apply it yet. Even to teach ESL to immigrants takes you to have a BA. Travelling is important in early age, but it is very expensive. I am not that open to spending thousands of dollars yet. Our 5-day trip to Rome & Florence this spring cost my boy-friend and I $5K. I regret I didn’t put that money away in IRA Roth plan, but I have always dreamed of going to Italy, so we splurged. It’s a trade off. No I have to go back to work and stare at my screan for 6 more hours.

      • Victoria, if you “don’t have time” for something, it’s just not a priority for you. Make time for things if you truly want to do them. Everyone has 168 hours each week. I am currently working full time, going to graduate school, picking up additional work skills in free time, working out three times per week, and in a committed relationship. I’m not trying to brag or boast, but trying to inspire you. If I can do it, so can you.
        As for your vacation, you chose the trade-off. Be glad you went to Rome! Everyone, including myself, cannot say that they’ve been there. If you actually regret going because of the finances, reconsider your next vacation or budget well in advance.

  2. Jessica says:

    While it’s always a good thing when a personal finance education or lecture can motivate and inspire young people, I find the 20-year old, making $30K and initially saving 20% to be more than slightly unrealistic–because 20 year olds only graduate high school, not college, and $30K a year (after taxes) isn’t that much to live on at ALL. That would leave you $24,000 a year (after taxes) to cover things like rent, heat, transportation, food, and loan payments. That’s $2,000 a month for all those things–when average rent is $600, average utilities are $100, student loan payments are $300; that’s already $1,000 and you haven’t even put food in the fridge, clothes on your back, hooked up a phone for your boss to call you, or gas in a car that probably still has a payment. And God Forbid you’re a part time employee (probably with 2 jobs) without healthcare coverage. I read once that the average uninsured broken arm costs $10K by the time everything is said and done and healed.

    Granted, by the time you hit 25, 28, 30, you’ve probably gotten raises that allow you to move out of your parents’ home, but that 20% estimate at 20 years old at $30K a year for 10 years comes out to $60K by the time you’re 30. Really? How many of us who have been fortunate enough to gain higher-paying jobs right out of college have contributed a base $60K (not including annual interest earnings) to retirement accounts by 30 years old? I considered myself to be doing much better than my peer group average to have $50K in a 401K at 30–a supposition that my financial adviser confirmed.

    McDonald’s has just come under fire this week for publishing their “Budgeting 101″ pamphlet, instructing people to hold their rent (including heat and AC costs) to $600 a month, including only $20 a month for health care costs, and estimating that all vehicle expenses come out to $150–and DIDN’T budget for food at all. Their monthly estimate came out to $1,300…You could certainly figure out how to invest your required $6K a year by holding those costs at a $30K income level as recommended by good ol’ Mickey D’s…but those costs are unrealistically low and have been widely criticized from all arenas because of it.