Updated: Mar 6
Your twenties are all about starting to carve out your own path, finding your feet, revelling in the freedom of adulthood and just having a great time, right? Absolutely. But, as counter-intuitive as this might sound if you're in your twenties, they can also be the very best time to start investing and growing your personal wealth.
Beginning to save and setting up financial growth strategies now is one of the best things you can do for your long-term prosperity and comfort. This decade is a great adventure, and although you might have plans, you never truly know what will be on your path. Whilst you’re young, vital, healthy and able to generate an income, you can support yourself today but also tomorrow.
Why save for retirement in your twenties?
As you are about to read, there are many compelling reasons to start saving now for your later years. However, don’t take any of this as doom and gloom! On the contrary, we think it’s important to focus on the end goal, which is, of course, positive. Here at ActOn Wealth, we work with you to remove the fear factors and instead look at this as a rewarding and empowering experience and opportunity. Still - it’s sobering to consider the following:
The pension won’t be enough
When the Australian Government made superannuation contributions compulsory, it sent us all a clear message - don’t rely on pensions. If any of us expects to hang up our working hat at the age of 66 years and six months and see out the last twenty odd years (based on our national life expectancy), we are sorely mistaken.
Current age pension rates are means-tested, with the maximum fortnightly amount for a single person sitting at $967.50. Everyday living expenses for a single retiree are $1,842 a fortnight. So, if you’re relying on a pension to fund your golden years, then you will fall 50% short of the mark. We live in a lucky country, for sure, but we have to work hard (or save hard!) to make the most of it.
Don’t rely on your superannuation, either
OK, we cannot rely on the Government to see us through our golden years. However, we can’t rely on our superannuation fund, either. For a comfortable retirement, the average couple needs $640,000 in their super fund, whilst a single person needs $545,000. The bad news is that the average Australian superannuation balance is just $143,979. Perhaps more worrying is that, on average, older Australians can’t rely on their bank accounts to prop up their superfund shortfall. On the contrary, the average bank account balance for men aged 65-69 is $399,872 and for women it's 358,055.
For financial freedom and flexibility when you retire
What if you were part of the fortunate minority that does hit your superannuation targets? Even so, you don’t want this to be your only income source, as you are still beholden to the market climate at the time (as those Australians who lose most or all of their super savings in the 2008 stockmarket crash will attest). Empowering your finances means empowering yourself. You have greater control over the age you finish working and instead turn full-time to the golf clubs, surfboard, art class, caravan, grandkids or whatever takes your fancy. Creating savings and investment opportunities in your twenties means you become less reliant on your salary to fund your golden years.
The sooner you start saving, the more wealth you create
Here at ActOn Wealth, we love the term compound interest, or in other words, the practice of reinvesting any interest you earn back into your savings. The sooner you start to save, the more compound interest you generate. Think of it as money making money; a passive way to grow your wealth. Moreover, starting early means making fewer sacrifices as you age and when you retire.
Start saving in your heydays
Granted, you are unlikely to reach your full income-earning potential in your twenties. For example, the average annual income for a 21 - 34-year-old Australian is $1,127.60 a week. This average actually reaches a $1,544.20 peak between 45 - 54 years. However, developing good saving and investing habits in your twenties conditions you terrifically well as you age. Indeed, sharpening these valuable tools and processes now will mean saving is effortless in your thirties and beyond, so you can crush your saving targets!
Moreover, typically speaking, a twenty-something-year-old tends to have fewer responsibilities compared to older demographics. Indeed, the average age of a first-time mother in Australia is now almost 30, whilst the average age of a first-time homebuyer is now closer to 40 than 20! As such, why not start to make hay whilst the sun shines, and those overheads are still on the distant horizon!
How much should you be saving for retirement in your twenties?
We like to consider a simple but effective practice when answering this and many other savings questions. The 50-30-20 budget rule advises splitting your after-tax earnings into three portions:
50% of your income after-tax is allocated to genuine obligations such as mortgage or rent, bills, food, school fees etc.
Take 30% of what remains and invest it
The other 20% covers all the fun stuff in life - entertainment, celebratory splurges, gifts, etc.
How to save for retirement in your twenties
As you can see, there are many valid reasons why saving for your retirement in your twenties is one of the smartest moves you can make in your life. So now it begs the following question - how to do it. After some earlier sobering insights, now we reach the uplifting part. It’s easy - that’s where we come in!
Someone patronising and no doubt reasonably old once said, “Youth is wasted on the young”. We don’t believe that. More and more clients in their twenties come to ActOn Wealth with a desire to start the way they want to finish. So if you’re asking yourself why save for retirement in your twenties, we’re here to help. This is an exciting time of your life, but together we can make sure your financial path burns bright well into your ageing years.
As it turns out, every member of our team adopted financial growth strategies in our twenties (if not our teens), so we practice what we preach. We look forward to sharing our knowledge and experience for you to benefit fully.