As if any younger person ever listens to advice. I certainly didn’t…
But in the interest of putting this advice out into the world, here it is.
If I were in my early twenties, I would do the following. I would recommend to allocate a percentage of my income to savings then investments. Not easy to do when I was that age. Investing minimums were too steep for a new earner. So if I had focused on building savings, I would have been ready to invest sooner rather than later. As it happened, I focused on “fun” and did not begin savings towards investment until much later.
Current tax rules make hindsight too clear. But when I first encountered tax-deferred accounts–namely, 401k and iRAs–I mostly considered the pre-tax benefit of these contributions. I had heard of the withdrawal needs and “if your tax bracket is lower in retirement…” caution, but I made assumptions that the withdrawal phase would be as tax advantaged as well. Unfortunately, that is not the case.
For one, while earning less income in retirement, I am still in the same tax bracket as my working years. Income includes RMDs which relentlessly increase in percentage each year, increasing the tax burden.
So, in retrospect, had I eschewed maxing out my 401k and traditional IRAs, and aimed as much as possible into Roth vehicles, mostly Roth IRAs, my current tax burden would be significantly less. And that is what I recommend.
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