Are you 22 and want to be rich when you retire? What if I told you with three steps, you could be? It’s not too good to be true; it will just take some work. Building a strong retirement plan early can make all the difference.
In this article I will lay out a three step plan to be able to retire rich if you start preparing for retirement when you are 22: maximizing a Roth IRA, buying a house 5 years after college, and supplementing with Social Security and Medicare.
1. Open a Roth IRA and Maximize Contributions
The easiest way for a 22 year old to retire rich is to open a Roth IRA as soon as possible and maximize the contributions to it. Roth IRAs are a retirement savings account where your contributions are made after income taxation, so there is no tax deferment. However, withdrawals made from the account after 59.5 years old are tax free. This means that there will be no income tax to deal with on withdrawals made during retirement.
The yearly contribution limit for Roth IRAs is $5,500 a year for a single person or $11,000 a year for couples. If you are married and can afford it, the contribution should be maximized at the higher amount as well. While $5,500 seems like a lot when you’re young, trimming back disposable spending will help reach that goal for many young people.
2. Buy a House Five Years After College
If you were to buy a house by the time you were 27, your house would be paid off by the time you were 57. This would mean that nine years before you were ready for retirement at the earliest, you would have one of the largest costs for any households totally paid off. This would eliminate most of the monthly housing costs that you could expect to have to pay during retirement. Additionally, it would open up the value of the house payment that could go directly towards retirement savings for several years before retirement.
While it may seem intimidating to be able to save up the required down payment account within five years after college, it can be done if you are committed to the plan. While living in a frugal “college life” is not fun when you are making much more money, the benefit of living that life for a couple extra years is worth it in the long run.
3. Supplement With Social Security and Medicare
While no one should plan on living in retirement solely on Social Security and Medicare, both programs work well as ways to help augment your retirement savings and reduce the medical care costs you expect to pay. Social Security provides an earnings estimator to help you plan for retirement. Since medical costs are such a large portion of what retirees spend their income on, Medicare has potentially great value to reduce the amount of your Roth IRA withdrawals going towards healthcare costs. However you may want to check with Medicare to learn what they do cover.
While these three steps are aggressive and will require sacrifice from any saver, if a 22 year-old maximizes Roth IRA contributions yearly, buys a house 5 years after college, and supplements with Social Security and Medicare, they will be able to retire rich.