5 Ways You’re Messing Up Retirement in Your 20’s

I know how far off retirement seems when you’re bogged down with student loans and credit card debt while being more concerned about buying a house and having kids (let alone putting THEM through college) in the coming years. Retirement seems more like something your parents and your boss should be worried about. I’m right there with you! But I also know that whether or not you are actually able to retire in that distant-feeling future can be a direct result of your financial behavior in your 20’s. Here are the 5 things that I see 20-somethings do that can really mess up their chances for a comfortable retirement.

1. They don’t start saving until they have a “real” job. Saving for retirement isn’t just for people climbing the ladder in high-paying salaried jobs. You can open an IRA as soon as you have earned income, even if you feel like you’re only making peanuts.

You’re never going to feel like you can “afford” to save, just like there’s never a perfect day to start a diet. You just need to start. The earlier you start, the more you’ll have (and the earlier you can retire), so don’t wait.

2. They wait until they’re eligible for their company’s 401(k) plan before saving. Some companies don’t allow employees to start saving in the 401(k) plan until they’ve been there for a certain amount of time (I had a job that made us wait over a year!), but that doesn’t mean you can’t save in the meantime. Get used to the paycheck reduction by saving at least the amount you’ll have to contribute in order to capture the full match and put that money in a Roth IRA instead. Then when you are actually eligible, it won’t feel like a pay cut to enroll in your 401(k) and take full advantage of that free money (aka the match).

3. They put their savings in cash or lower-risk investments. Have you heard of the “rule of 72?” It says that dividing 72 by your interest rate gives you the number of years it will take for your money to double. So if you put your money in a 1% money market investment, it will take 72 years for it to double. Retirement may feel like eons away, but it’s not 72 years away!

I can understand why you would hesitate to subject your hard-earned savings to the possibility of market loss, but you have time to recover from market crashes. Market volatility (stocks going up and down) is a fact of life, and while there is no guarantee that history will always repeat itself, a well-diversified portfolio that includes investments in the stock market has always been a better option than cash or bonds when the investor (you) has many decades before he/she will need the money. As a very wise woman said to me when I was in my 20’s, “Now is not the time to play it safe. You have time to recover from mistakes.”

4. They pick their investments willy-nilly. When you do contribute to a 401(k) plan, you’ll also have to choose your investments, which are typically a variety of mutual funds to choose from. If you don’t know anything about the stock market, it can be hard to figure out what funds to choose. Don’t do what I did with my first 401(k) and just put 5% in each option. Bad idea!

If you truly don’t know what to do and you’re not lucky enough to work for a company that offers financial wellness programs, hopefully your plan offers what are called “target date” funds. These are funds that are allocated among the various classes of the stock market according to your desired retirement date. As you approach your target date, the mutual fund manager automatically shifts more of the investment into less-risky asset classes like cash and bonds. It takes all the guesswork away!

5. They take out 401(k) loans. Borrowing from your 401(k) can seem attractive because hey, you’re paying yourself back instead of some bank and the interest rate is pretty low. There are a few flaws to that logic though:

  • First, as long as that money is out of the account, it’s not growing in the stock market.
  • Second, should you quit or be laid off, the loan usually becomes due immediately or else it’s treated as an early distribution, which means you may pay a 10% penalty plus taxes on the amount outstanding.
  • Finally, you’re exposing your savings to loss in case of bankruptcy. We see a lot of people take out 401(k) loans to try to ease up on credit card debt, but then they run the cards up again and end up having to declare bankruptcy. 401(k)s are exempt from bankruptcy, but the money you borrowed is not.

The bottom line is that retirement IS a long way off when you’re young. But take it from this almost-40 year old: It will be here sooner than you think and you’ll never regret saving.


Securities and advisory services offered through CommunityAmerica Financial Solutions, LLC (“CAFS”), Member FINRA/SIPC. CAFS is a SEC registered investment advisor. Products offered through CAFS: are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the credit union, and may involve investment risk including possible loss of principal. CAFS is a wholly-owned subsidiary of CommunityAmerica Credit Union.

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