Countless workers dream of retiring early and enjoying the benefits that come with it. But if you really want a shot at early retirement, you'll need to start planning for it sooner rather than later. If you're in your 20s, you have a great opportunity to set that stage. Here's how.
1. Start contributing to a retirement plan immediately
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Those folks who retire with a few million dollars don't necessary command whopping salaries. Rather, they start saving from a young age and let the power of compounding work its magic.
The thing to realize about building a nest egg is that if you start early enough, your money and investments will do the work for you. Or, to put it another way, if you give yourself the longest possible savings window, you can turn a series of relatively modest contributions into a sizable sum over time.
The following table further illustrates this point:
Imagine your goal is to retire at 62 (which, at least for Social Security purposes, is considered early). If you start setting aside $500 a month at 22, you'll wind up with a cool $1.55 million at an out-of-pocket cost of just $240,000. That's six and half times your initial investment. Even if you miss the boat in your early 20s and don't start saving until your late 20s, in the above scenario, you'll still wind up with over $1 million with enough time to retire early.
The thing to realize is that the longer you wait to begin saving, the less compounding you'll benefit from -- which is why it pays to commit to socking money away consistently, starting with your first decade on the job. Come 2018, workers in their 20s can put up to $18,500 a year into a 401(k), and $5,500 a year into an IRA. Even if you can't max out quite yet, aim to save a small amount and increase that figure over time. It'll work wonders for your nest egg.
2. Invest in stocks
Many investors fear the stock market because it can be a pretty volatile beast. But the one thing to know about the stock market is that it has a tendency to climb over time, which means that if you're in your 20s and have a lengthy investment window, you're more likely than not to come out ahead.
The problem, however, is that many young savers stay away from stocks and put their money into safer investments. And while that approach might, in theory, help you sleep better at night, it's not doing your nest egg much good.
The following table shows how your retirement savings might ultimately fare depending on how safe you play it:
You can't help but notice the tremendous difference between a conservative investment strategy and an aggressive one. In our example, you're looking at retiring with well over $1 million less if you limit yourself to safe investments and avoid stocks completely. On the other hand, the stock market has historically delivered an average annual 9% return, which means that if you put most of your money there, you have a better chance of making early retirement a reality.
3. Stay out of debt
Americans aren't strangers to debt, and that includes 20-somethings. Not only has credit card debt reached an all-time high, but people are borrowing more money to attend college, buy homes, and finance cars. If your goal is to retire early, then one of the best moves you can make in your 20s is to stay away from debt (or, at the very least, avoid bad debt -- if you're going to buy a home, there's pretty much no getting around a mortgage).
Think of it this way: The more debt you accrue, the more money you spend on interest. And for every dollar of interest you pay, that's $1 less going toward your nest egg.
Not everyone gets to retire early, but if you want a real shot, then your 20s are the right time to start focusing on the big picture. Prioritize retirement savings, invest wisely, and avoid debt like the plague. With any luck, you'll one day join the ranks of those lucky folks who get to call it quits several years ahead of the pack.
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