Young people have it made. They have their whole lives ahead of them and ample time to plan for retirement. The trouble is that few actually plan. Even those who save a decent percentage of their take-home pay, rarely plan for the future and fund tax advantaged accounts like they should. The good news is that you can achieve your financial goals, if you start early enough. To that end, below are some tips that will help you have a comfortable retirement.

Tutorial: Investing 101 For Beginner Investors

How much should you save? There is no perfect answer to this question, however, you should save as much as you can, without adversely impacting the quality of your life. In other words, it's OK to indulge in a night out once in a while, or a latte from Starbucks, as long as it doesn't become such a regular occurrence that you aren't left with money to save. (To read more, see Enjoy Life Now And Still Save For Later and The Beauty Of Budgeting.)

Ideally, everyone should strive to save at least 10% of their salaries each year. That may not always be possible, after all, nearly everyone has months where they can't save a dime. Perhaps you have to shell out for a new washing machine, or for new tires and brakes for the car. When you do have one of those months, however, you should really try to tighten your belt the following month.

Also, consider your spending habits. Do you really need the super sports cable television package, the magazine subscription, the big minute cell phone plan, or the high-end brand name clothes? Sure, when you are young, this might seem extreme, but in the long run, you're building good habits and saving money in the process.

By cutting back on a few of the following expenses, you can set yourself on a path to financial success, even if you don't have a big salary.

  • Reducing cable TV expenses: $15
  • Coupon savings for both food and consumer goods: $25
  • Buying generic brand items: $30 (-10% is conservative, assuming monthly food/toiletries cost of $300).
  • Initiating a cheaper cell phone plan or, better yet, eliminating your home line and just maintaining your cell phone: $30
  • Buying regular gas instead of premium: $10 to $20

As you can see, a few small savings opportunities can really add up, especially if you put the money you've saved into a retirement account. (To learn more about the benefits of starting young, see Why is retirement easier to afford if you start early?)

Your Home
Many people live above their means; they lay out big money for that high-end apartment, or build a big house and take on a mortgage that is way over their heads. This is a mistake. Live comfortably, but not above your means, no matter what the Joneses next door are doing. If you do otherwise, you are unlikely to have anything left to save at the end of the month and you may even rack up a pile of debt. (To learn more, see Downsize Your Home To Downsize Expenses.)

So many financial advisors recommend using a low-rate loan to consolidate debts and reduce annual interest expenses. This is usually a great idea, but it's even better if you avoid racking up any debt to begin with. Home equity loans range anywhere from 8% and up, while credit card rates are around 20% per annum; running a monthly balance will cost you big money. Don't put anything on your credit card you won't be able to pay for at the end of the month. Don't take out a home equity loan unless absolutely necessary, and don't finance appliances or home improvements. In other words, wait until you have the money in your pocket before you spend it. (To learn more, see Digging Out Of Personal Debt.)

Funding Retirement Vehicles
When you get your first full-time job, consider setting up a 401(k) plan. This will allow you to put about 15% of your gross income into the plan. The money will come out of your check pretax, and you won't have to pay capital gains year to year, but rather upon distribution when you are 59.5.

Also, consider funding a Roth IRA. With a Roth IRA you take after tax money and put it into an account that can be invested in a mutual fund, stocks or bonds. The advantages to this type of account are you don't have to lay out any money on capital gains each year, nor do you have to pay tax upon distribution. The catch, however is there are, like the 401(k), some income limitations; consult your advisor as these are based upon tax brackets. However, each individual can currently deposit up to $4,000 each year in their account. That's huge! Over time you can build up a tremendous savings with this vehicle. (To find out more, see Roth Vs. Traditional IRA: Which Is Right For You? and How do I go about opening up a Roth IRA?)

Young people often don't think about taxes, but they should. Before buying a home or living in a certain area, consider checking what the property tax rate is. Perhaps it makes more sense to live in the next town over. If you are in a job as a consultant, start up your own business, or have other expenses that are not reimbursed by the company you are working for, those expenses may be deductible. As for income tax, be sure to apply for any deductions for which you may be eligible.

In many cases, it may be wise to avoid doing your own taxes and to visit a certified public accountant (CPA). Spend the $175 they'll probably charge you, because the odds are they'll be able to identify deductible expenses, or recommend tax advantaged ideas better than you ever could. When all is said and done, paying up for this type of expertise is usually worth it.

Planning for a Family
Whether you are getting married, buying a house, having a child or making some significant change in your life, you should always re-evaluate your financial situation. Are you saving enough? Will you have enough money to retire, pay for the kids' college or buy that sports car you always wanted when you retire?

Don't forget to consider life insurance and/or disability insurance. You need to make sure that your family will be taken care of, if, for some reason, you are unable to work.(To read more on how to plan for these events, see Revealing The Hidden Costs Of Weddings, Your Financial Life: From Stressful To Stress-Free and Retirement Savings Tips For 18- To 24-Year-Olds.)

The Bottom Line
Your actions now will have a huge impact in determining how you live in your retirement years. So plan and save now. Enjoy your life, but live within your means. You'll be happy you did! (To read more, check out How Much Life Insurance Should You Carry? and Five Insurance Policies Everyone Should Have.)

Related Articles
  1. Investing

    10 Ways to Effectively Save for the Future

    Savings is as crucial as ever, as we deal with life changes and our needs for the future. Here are some essential steps to get started, now.
  2. Professionals

    How to Protect Your Portfolio from a Market Crash

    Although market crashes are usually bad news for your portfolio, there are several ways to minimize losses or even profit outright from market movement.
  3. Retirement

    How Robo-Advisors Can Help You and Your Portfolio

    Robo-advisors can add a layer of affordable help and insight to most people's portfolio management efforts, especially as the market continues to mature.
  4. Professionals

    3 Benefits of Working Longer (and Retiring Later)

    There are many reasons why folks in their 60s may want to keep working until at least age 70. Here are three.
  5. Retirement

    What Does It Cost to Retire in Costa Rica?

    Tally up the costs associated with taking your retirement in Costa Rica, and determine whether you have what it takes to live in paradise.
  6. Budgeting

    How to Cost Effectively Spend on Baby Clothes

    Don't let your baby's wardrobe derail your budget. These top tips help you to save money and spend wisely on baby clothes.
  7. Personal Finance

    College Students are Failing Financial Literacy

    Financial trends among college students are a cause for concern, prompting a renewed emphasis on financial literacy.
  8. Retirement

    5 Great Timeshare Locales for Retirees on a Budget

    For retirees on a budget, there are affordable timeshares located in charming towns that don't cost a fortune for vacation time.
  9. Retirement

    How Are 401(k) Withdrawals Taxed for Nonresidents?

    As a U.S. nonresident, deciding what to do with your 401(k) after you return home comes down to which tax penalties, if any, you're willing to incur.
  10. Retirement

    Why Are Annuities Important for Retirement?

    Understand how annuities work, and identify the benefits they provide for retirement, the most salient being a guaranteed income stream for life.
  1. What are the risks of rolling my 401(k) into an annuity?

    Though the appeal of having guaranteed income after retirement is undeniable, there are actually a number of risks to consider ... Read Full Answer >>
  2. How does a Roth IRA grow over time?

    Your Roth IRA account grows over time thanks to two funding sources: contributions and earnings. While your contributions ... Read Full Answer >>
  3. Can my 401(k) be seized or garnished?

    As long as your retirement funds are held in your 401(k) and you do not take them as distributions, your 401(k) cannot be ... Read Full Answer >>
  4. Can my IRA be taken in a lawsuit?

    Whether your IRA can be taken in a lawsuit depends largely on your state of residence and the judgment in question. There ... Read Full Answer >>
  5. Are mutual funds considered retirement accounts?

    Unlike a 401(k) or Individual Retirement Account (IRA), mutual funds are not classified as retirement accounts. Employers ... Read Full Answer >>
  6. Can my IRA be garnished for child support?

    Though some states protect IRA savings from garnishment of any kind, most states lift this exemption in cases where the account ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!