You want to be saving for your retirement in your twenties.
Why? Many of us think our country will take care of us when we reach old age. But what if we keep changing country? What if we don’t spend more than 10 years in one place? What if your country doesn’t give you enough to live on? It does suck to be poor when you’re young, but it sucks even more when you’re old. We’re not saying sacrifice all your money now so you can retire comfortably – the good news is that if you start in your twenties, you’ll only have to sacrifice a little bit for a comfortable retirement. 🎉
You have one huge asset that can be pretty much a game changer: time.
Here are 3 reasons now is the best time to get started:
1. Your country might not take care of you
The amount you get in your pension depends a lot from country to country. It also depends on how many years you’ve worked and how much you’ve earned in that country. In Spain, depending on how much you’ve earned over the years, your retirement will earn a low 155€ per week, or go to the maximum of 535€ per week. For France, the minimum is 130€ per week while the maximum is 340€ per week. In Germany there is no minimum or maximum since workers pension insurance is compulsory. And in the UK it is a pretty low £125-£165 per week – although retirees have quite a few subsidised benefits.
So as you can see, most of these numbers aren’t very high. The maximum pension in Spain is 2,140€ per month, which yes, is actually pretty good. But you have to work 15 years in Spain to get 50% of that pension, and work 35 years and a half in Spain to earn the full 100%.
For us people who plan on working in several countries and on digital nomading for a while, 35 years working in the same country seems like a bit much. So who’s going to pay for your pension if you change country every 7 years? Yourself. And that’s why you gotta start early.
2. You have TIME = compound interest
But it’s all good, because if you have time on your side then you don’t need to put away a lot of money. With a simple 15% of your income, you’re doing well. 😛
Let’s steal an example from Tony Robbins’ book ‘Unshakeable’ to illustrate this:
Two friends, Joe and Bob, decide to invest $300 a month. Joe gets started at age 19, keeps going for eight years, and then stops adding to this pot at age 27. In all, he’s saved a total of $28,000.
Joe’s money then compounds at a rate of 10% a year (which is roughly the historic return of the US stock market over the last century). By the time he retires at 65, how much does he have? The answer: $1,863,287. In other words, that modest investment of $28,800 has grown to nearly two million bucks! Pretty stunning, huh? (yes it is, Tony).
His friend Bob gets off to a slower start. He begins investing exactly the same amount – $300 a month – but doesn’t get started until age 27. Still he’s a disciplined guy, and he keeps investing $300 every month until he’s 65 – a period of 39 years. His money also compounds at 10% a year. The result? When he retires at 65, he’s sitting on a nest egg of $1,589,733.
Let’s think about this for a moment. Bob invested a total of $140,000, almost five times more than the $28,800 that Joe invested. Yet Joe has ended up with an extra $273,554. That’s right: Joe ends up richer than Bob, despite the fact that he never invested a dime after the age of 27!
Although Tony’s numbers are a little optimistic with a 10% rate of return, the concepts remain the same. By investing early and allowing compound interest to do it’s trick, you don’t need to put in that much, all you need to do is start early. This is because by the time Joe is 53, the compound interest is adding over $60,000 per year to his balance. And by the time he’s 60, he’s adding $100,000 per year. And if he had continued investing $300 a month till he was 65..? It would be an astounding $3,453,020!
If $300 sounds like too much for you, then simply adapt. Could you put away $100? Use some of these compound interest calculators to see how much you’d need to save in order to have a comfortable retirement. A good starting point is 15% of your income. For those of us who are right at the beginning and focusing on skill-building and exploring, even 100€ is quite a lot to put away (including me!), well then start with 50€. But the important thing is to start.
Even if I put 50€ away every month from the age of 20 till the age of 65, with a 10% interest rate I will get €454,367.15 at the age of 65. Imagine if it was 100€. Yes, it would be 908,734.29€. Not bad, huh?
For more info on investing check out these posts:
To get started with investing, it’s not so easy to give advice because each strategy varies from country to country. But as a general rule you want to be investing in global index funds/ETFs using a tax advantaged account. Here are some great resources to learn more:
3. Your future self will thank you
Many people don’t understand the concept of saving now for the future because they ask
‘What’s the point in having all the money when I’m in my 60s when I won’t need it? I’m better off using it now’.
For this reason I say save 15% and not 50%. As we saw before, thanks to having time on your side you don’t need to sacrifice a lot to have a comfortable retirement. And this 15% is sacred – I would not use the money you’re saving for retirement to buy a house or to pay for a huge expense. This 15% is yours, for your future self. And you will thank yourself for having that money when you’re older.
Right now 15% won’t be much. But if you take the time when you’re younger to build career capital and find a job or activity of best personal fit, you’ll be making money. You’ll make most of your money in your 40s to 50s, and that’s when your 15% will make a real impact. 👌
Nowhere are we saying sacrifice your current money to live like a king in your 60s. We’re saying sacrifice a little bit of money to live like a comfortable, normal 65 year old (and even retire early if that’s what you’re interested in).
These are 3 reasons why saving for retirement in your twenties can take you very far. Most times, retirement is the last thing on your mind when you’re young, but really it all depends on what you value and want later in life. If you are financially educated and value your freedom, you know that you’d rather trust yourself with your money rather than the government. If you want freedom, now is the time to start. 🎉🎉