How You Can Retire Rich in 20 Years

By Susan Weber

You may be able to retire rich if you make the right financial decisions.

Living your life to the fullest in your 20s and 30s has left your bank account a little dry. However, you may be able to retire rich in 20 years if you make the right decisions. It will take good financial planning and diligent execution of your plan by setting goals and finding the right investments.

How to Retire Rich in 20 Years

If you are not rich now, and you don't think you'll inherit a large amount of money, the only way you can retire rich in 20 years is to have an aggressive investment program. Once you reach retirement, you will need to manage your investments and your spending to make sure that you can keep your wealth.

If you are eligible for Social Security in 20 years and if your home value increases, they will contribute to your financial portfolio. But, they will not play a major part in your plan to retire rich in 20 years. Your wealth will come from your investments.

Making Decisions about Your Retirement

To start to build wealth, you need to decide:

Your financial goal - How much money do you want to have available in twenty years?
Your investment choices - What types of investments will you need to build your nest egg?
Your budget cuts - What expenses are you willing to forego in order to have more money to invest?

Setting an Investment Goal

Your investment goal should be the total of what you need for everyday expenses plus what you want to have to enrich your lifestyle. Many investment sources suggest that your expenses will drop once you quit working and you will only need 60-to-85 percent of your gross household income after you retire. You will want to increase this percentage significantly if you want to be "rich" when you retire. A retirement calculator can compute how much you will need to have at retirement. It will take into consideration the:

Amount you need to cover your living expenses.
Effects of inflation.
Projected annual return from your investments.
Effect of compound interest on your investment returns.

Once you know what you will need, you can then determine how much more you want to invest so that you can achieve a large financial portfolio. Charts on the Internet can help you determine how much you will need to invest in order to reach your goals.

The earlier you start to invest, the better your chances to set aside a large portion of money for retirement. If you have not invested money yet you will need to invest very large amounts of money each month. For example, a chart on Kiplinger.com shows that if you are age 45 and have no savings set aside, you will need to invest $3,395 each month and earn 8 percent annually on your investment in order to have $2 million set aside for your retirement.

Selecting Investments

Look for investments that give you tax advantages and which have features that can help you quickly grow your investment balances.

For tax advantages, consider opening both a 401(k) plan and an Individual Retirement Account (IRA).

401(k)

Your employer will set up the account for you. You make contributions to the account by having withdrawals taken from your paycheck. Your contributions are not considered taxable income so your annual income tax will probably be reduced. The earnings from the 401K are not taxed until they are withdrawn. Your employer will usually match your investment up to a certain percentage of your gross income. You should invest as much as you can to get the full match contribution from your employer. If you contribute any less, you are just turning away free money from your employer. If you can't contribute the full match contribution in the first year, start with a smaller percentage and set a goal to increase that percentage each year. Your eventual goal should be to contribute 10 percent or more of your annual income or up to the maximum annual contribution.

Be sure the 401(k) funds are invested in multiple companies so that your investment return is not negatively affected by the decline of one company. If the 401(k) fund only has one company you should close the account and roll the balance to an IRA.

401(k) plans are provided by private employers, 403(b) plans are provided by non-profit organizations and 457 plans are provided by government agencies. All three have similar tax advantages.

IRA

IRAs have tax advantages that will help your investment balances grow more quickly. There are two types of IRAs - a Simple or Traditional IRA and a Roth IRA. Each has different tax advantages and distribution features. You should invest as much as possible in the IRA to take advantage of the tax-deferred earnings. You should fund your IRA throughout the year, not waiting until the April deadline. Your contribution will be in the account longer and will be able to grow for a longer period of time.

For quickly growing your investment balances, consider stocks and mutual funds with aggressive growth projections.

Stocks

Aggressive growth stocks are usually high-risk stocks. You should work with a financial planner or stock expert to determine which stocks would be the best for your particular financial situation. You need to do research on stocks before investing to ensure that you understand their risk. High risk stocks are usually volatile and need to be monitored daily to determine if they should be kept in your portfolio or if they should be sold and replaced by another stock.

Mutual Funds

Mutual funds are groups of stocks or bonds (or both) that are managed by investment professionals. An investment professional can direct you to mutual funds which are invested in aggressive stocks, have a track record of high returns, have low management fees and charges.

Budget Your Investing

Review your monthly expenses and determine where you can find additional cash that you can invest. For example:

Set up an automatic payment from your checking account to your investment account.
Cut back on discretionary purchases such as entertainment, clothing and home furnishings.
Stop using credit cards. Refinance the debt on high interest credit cards. Invest the interest savings.
Delay purchasing a new car. Invest the amount that would have been used for a car payment.
Cut back on mortgage or rental expenses by moving to another home. Invest the savings.
Refrain from purchasing a larger, more expensive home. The mortgage savings can be invested.