retirement fund

A Guide to Planning Your Retirement in Your 20s

Recent research shows that only around 44% of Australians aged 40 and above feel positively ready for retirement. Hence, many experts recommend planning to have sufficient money that can last through retirement.

Planning for retirement in your 20s seems too early. However, starting early on means having more time on your side. Retirement planning can begin as simple as saving for kit homes designed to be granny flats, especially if you don’t wish to see yourself in a nursing home in the future. But there are smarter ways to prepare for it.

Start Budgeting and Tracking Expenses

Now that you’re working and earning your own money, it’s so easy to get excited about all the things that you want to buy—emphasis on “want” because chances are, you don’t need them. While it’s not necessarily wrong to treat yourself once in a while, it’s imperative to live within your means. Avoid falling into the pitfall of spending more than what you earn. For starters, a good budgeting strategy is the 85/15, wherein you live only on 85% of your income, then the remaining 15% goes to savings or investments. Likewise, make it a habit to keep a record of your spending. This way, you’ll know where a significant portion of your money goes; thus, enabling you to make smarter financial decisions in the future.

Know Where to Save Your Money

Opening a savings account is ideal, but there are also other programs specifically designed for retirement funds. For instance, the superannuation guarantee, known as super. The super is a retirement savings program mandated by the government which requires employers to contribute 9.5% of each employee’s earnings into a super fund of his choice. In general, this applies to all employees who are 18 and above, are paid at least $450 a month (before tax), and work more than 30 hours a week. As an employee, it’s essential to know all your benefits and make the most of them. If you fall within a lower income bracket, you may also check if you’re eligible to apply for a low income super tax offset (LISTO) or a super co-contribution.

Understand How Compounding Works

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Compounding is about earning interest on your initial money, then earning another interest on the interest you just received. This can go a long way if you start at an early age. Also, the Rule of 72 comes in handy in helping you estimate the number of years needed to double your money at a specific compounding interest rate. Divide 72 by the annual rate of return to determine how long will an investment take to increase its value. For example, it will take around 14 years to double the amount of an investment with a 5% compound annual rate of return. Your 20s is the best time to maximize the benefits of compounding interests.

Settle Your Debts and Avoid Them in the Future

Lastly, settle your debts as early as possible. Compounding interests apply to mortgages, too. Again, it goes back to spending within your means to avoid drowning in debts. If you really can’t reduce your spending, then increase your income. Work longer hours, seek for a job that pays more, or have a side hustle. This way, you don’t live from paycheck to paycheck.

Your 20s is a critical decade of your adult life. While it’s okay not to have everything figured out yet in your 20s, in your 40s or 50s, that’s going to be a different story. Planning for retirement surely requires self-discipline and sacrifice. Starting early gives you an advantage, so make the most of what you have now to prepare for your golden years to come.