Stage 1: Age of Majority

Whether you are just entering adulthood or just looking back fondly, your first years as an adult (roughly 18 to 30) can be an exhilarating time. Idealism runs high. Opportunities and energy seem limitless.

There is no doubt that young adulthood is a great time in a person's life. Consider for a moment, though, these sobering famous quotations:

Youth comes but once in a lifetime.
        --Henry Wadsworth Longfellow

Youth is a period of missed opportunities.
        --Cyril Connolly

Youth is wasted on the young.
        --George Bernard Shaw

Although entertaining, the three quotations above serve a very practical purpose. Taken together, they capture the essence of the problems faced by young adults in the first stage of the life cycle model of retirement planning.

In retirement planning, as in all other areas of planning, the sooner planning occurs, the better. More importantly, the sooner you begin setting aside money for retirement, the easier it will be to reach your retirement goals.

People in the first life cycle stage are young adults who roughly fall into the 18-to-30-year age group. Besides an abundance of youthful energy, this group has the most time to make the magic of compounding work to their advantage. Unfortunately, this group generally has the least financial means and the least desire to begin saving for retirement.

Apart from being one of life's many cruel ironies, saving for retirement at this early stage is important on many levels. From the individual's perspective, this represents the first and definitely the best opportunity to start saving toward retirement. Time is the greatest asset you have at this stage, and it allows a little savings, properly invested, to go a long way.

From the employer's viewpoint, participation of younger employees (who tend to be paid less) in a 401(k) plan is a must if the plans are to pass required nondiscrimination tests. In order to encourage participation in such plans, employers often provide matching programs that match an employee's contribution to the plan dollar for dollar or more. Those employees that don't contribute despite this incentive are basically throwing away free money.

Warning Most literature available on this topic encourages people to set aside money for retirement whenever possible and to participate in an employer's retirement savings plan. The literature also states that it is never too late to start saving. Well, the harsh reality of the matter is that there is a point when beginning to save money will have little or no impact on your ability to retire. In other words, don't wait until you are ready to retire before you start saving for retirement.

To illustrate how important it is to start saving earlier rather than later, we provide a table here and in the later life cycle discussions that shows how long it takes to save the same amount of money for retirement, but starting at different times in your life. The tables all assume a savings goal of $100,000, a savings deposit at the end of each year, an 8 percent annual rate of return, and a retirement age of 65.

After looking at the table above, you should note that if you start saving at 29 rather than 18 you will have to save over twice as much to reach the same amount. Realistically speaking, most 18-year-olds are starting college, barely working above minimum wage or a combination of the two. However, when you further break down the initial savings required of an 18-year-old, it is just a shame that less than $4 a week can't be scraped together to start saving for retirement.

If you are in this life cycle period, don't waste the great opportunity to start saving early. Just think how amusing it would be to ask your parents for a $4 increase in your college allowance to help fund your retirement. Or, when out with your friends, sacrifice that last beer at your favorite watering hole for the cause. If your friends give you grief, remember that you will definitely have the last laugh when you watch your friends slaving away at their jobs while you are living la dolce vita (the sweet life) in retirement.

Tip Saving early is great, but it is not enough if your savings are earning little or no money. At a minimum, your savings and investments should be making more than the rate of inflation. There are numerous ways to fund retirement. The thing to remember is that being too conservative with your investments at this stage of the life cycle is a very bad thing. You have to take a long-term investment strategy. Keep in mind that you are trying to build wealth. Although higher rates of return include higher levels of risk that something may go wrong, it is easier for you to bear the risk and recover from it when you are young. Don't be reckless, but save your conservative investments for your later years, especially prior to retirement.