Retirement planning is one of the most basic pillars of the personal finance blogosphere. Nearly everyone who blogs about anything related to finance will advise you to save for retirement as soon in your working life as you can and to the greatest extent possible.
That’s good advice—generally speaking—but if you’re twenty-something and looking to establish yourself in life a bit, you may have a few other financial concerns to tackle first.
If you’re fresh out of school the first priority has to be landing that first job and establishing yourself as a long-term player. In a perfect world it would be good to get your company sponsored retirement plan going at the same time. In the real world however there may be a few things more immediate in scope that need to be taken care of before committing to a very long-term project like a retirement plan.
From a different direction, employers sometimes frown on job candidates who are overly concerned with the company’s retirement plan (NOT a good question to bring up on an interview!). You’re beginning a new career and already focusing on it’s ending; no matter how harmless your intentions, it can come across as a motivation conflict.
Your basic savings
Retirement investments are long-term savings, and as important as that is, short-term savings are even more so. It’s fine to be setting money aside for the future, but that will do little to enable you to deal with emergencies that can crop up as early as tomorrow.
Sure, you could draw down your retirement savings in a pinch, but that usually comes with complications. If you don’t have some money set aside to cover current emergencies, you really can’t afford retirement savings.
Savings have another purpose that’s especially important for young adults. The more savings you have, the less likely you’ll be to go into debt. If you already have substantial debt, the last thing you want to do is add to the pile. Emergency funds will help you to avoid that problem.
If you have large student loan balances, credit cards and a car loan, your financial plate is already just about full. Yes, it would be nice to start retirement savings so early in your life, but your debts are a much more immediate threat to your financial well-being. Too much debt can even threaten your entire financial situation. At a minimum, you need to lower your debt to a level you can easily manage before you begin saving for retirement.
This is even more important than it seems at first glance. The financial patterns of your life will largely be established when you’re in your twenties. Debt is not pattern you wan to embrace! You may have needed debt to get through school and to establish yourself as an adult, but the sooner you get rid of it the better the rest of your life will be, financially speaking.
And here’s a bonus: the lower your debts, the less you’ll have to pay to service them. The less you pay to service your debts, the more money you’ll have to eventually fund your retirement plan.
Feathering your nest a bit
This is an issue that’s largely ignored in perfect world financial discussions. But the fact is you will need certain “tools” in order to participate in the modern workforce, and they’ll have to be paid for one way or another.
Which do you need more, to begin retirement funding or to buy a car so you can get to work? No car equals no job, equals no paycheck to fund retirement.
And it’s not just a car you’ll need. You’ll probably need a place to live that’s reasonably close to work, some basic furnishing so you don’t have to sleep on the floor, a laptop computer and/or smart phone for use in work (and finding work when necessary!), and some clothing so that you’ll have something to wear on the job.
If life were perfect, you’d begin paying off your debts in big chunks, quickly amassing an impressive emergency fund, buying your car, laptop and smart phone, and doing max funding on your retirement—all out of your little, old paycheck from your very first job.
Back on Earth however, real people have to make hard choices that don’t always allow us to do all things at once. That requires prioritizing. You have to decide what financial issues are most important and budget accordingly.
You might set a hierarchy that looks something like this:
- Land your first job
- Buy the physical necessities
- Get some money saved so you don’t have to rely on credit
- Begin paying your debts down until they reach a manageable level
- Then begin funding your retirement
You can change the order of course, but I have a feeling that even if you do retirement funding is unlikely to be at the top of the list.
What do you think—is the emphasis on early retirement contributions a bit obsessive? Do you agree that there are other priorities for young people?