How to set yourself up for retirement by age 22

by | Nov 23, 2020 | Thoughts | 0 comments

Here’s an idea: What if it were more standard for young adults to take a gap year after high school to work, gain real-world experience, and save a lot of money?

There are at least three reasons that this could be an extremely high-leverage decision:

(1) Your living expenses are never lower than when you are young and single, have cheap taste, and (possibly) live with your parents, or can at least live in a shared house with multiple roommates. That means you can save a lot of money.

(2) You will never have a longer time horizon to invest your money and let compound growth work its magic.

(3) A year of real-world experience after high school would allow young people to make more informed decisions about whether the college path (and the associated costs, etc) is right for them, or if they’d rather join the workforce, start their own business, travel, etc. If they do decide college is right for them, they would have more self-knowledge to help them decide where to go and what to study.

The question is, would that plan really make that big of a difference in people’s lives? Let’s find out.




Meet Alex.

Alex is a 16-year-old who gets her first summer job waiting tables at a local restaurant.

She earns around $15/hour (including tips) and works 30 hours per week so she still has plenty of time to hang with friends and travel with her family on a few 3-day weekends.

By the end of her 12-week summer break, she has earned $5400. After taxes and setting aside $1000 for fun spending money, she is left with $3800, which she puts into an investment account that her parents helped her open. She invests her savings in a low-cost index fund and promptly forgets about it.

The next summer, after her junior year, she does the same thing. Remember, Alex is only working summers, and just 30 hours a week, so she is completely free during the school year to focus on her education, sports, and social life.

During her senior year of high school, Alex decides she enjoys working and saving money, plus the restaurant has offered her the role of assistant manager after she graduates, which she is excited about. So she decides to take a gap year after high school. At this point, in her new role, she is earning closer to $20/hour after tips. She works 40 hours a week for the next year while living with her parents and applying to colleges.

Here is Alex’s gap year breakdown:

  • Gross income during her gap year: $40,000
  • Take-home pay after taxes: $31,000
  • Amount she sets aside for spending: $6,000 ($500/month*)
  • Amount leftover to put into savings: $25,000
    *Low living expense = the perk of living with parents. Admittedly not an option for everyone, but directionally some version of this could probably work for many people, + / – a few years and/or a few thousand dollars.

Over the next four years at college, Alex is largely focused on her education and her social life, but she does pick up some jobs here and there, mostly in the summers. She manages to save $5000 each year during college.

At the age of 23, as she is walking across the college graduation stage, Alex has $66,000 sitting in her investment account (which includes $13,000 (!) in interest she has earned since she started saving).

Pretty awesome, right? And the thing is, Alex’s path, or something close to it, is a very realistic path for most people. 

But the magic has only just begun…




Now, imagine that after college, Alex never saves another dime. This is probably unrealistic, but let’s explore this possibility for the sake of illustration. 

Alex is in the real world now, and between her non-profit salary, living in an expensive city, and her student debt payments, she’s barely breaking even every year in her 20s. She can’t afford to save anything.

Even as her salary rises later in her career, she is still unable to save because her lifestyle gets more expensive, she has kids, there are medical bills, and life just sort of happens.

But, Alex has one rule: she never touches her investment account. Even though she hasn’t contributed to it since she was 22, she checks in on it every year and is always surprised to see where it’s at.

So, what’s the balance of Alex’s investment account?

Age 28: $100K
Age 50: $500K
Age 63: $1M
Age 70: $1.7M

Even though she did not save a single penny after the age of 22, Alex still has $1.7M in the bank when she retires. She can safely withdraw around 4% per year, which gives her a passive income of around $6000 a month for the rest of her life. (Not even including Social Security.)

This is the power of saving young and letting compound interest work its magic. Alex’s initial savings of $52,600 yielded $1.7M – a 32X return! 

Put another way: Every $1000 saved at the age of 20 is worth around $30,000 at the age of 70. (For comparison, $1000 saved at the age of 40 is worth $7500 at the age of 70, which is pretty good but still no comparison.)

Imagine if everybody had that kind of financial security? How would that change the psyche of this country?




We’re curious: Whether you are a college student, over 50, or anything in between – what is your reaction to reading this?

Should we be encouraging young people to work and save more? Do we overemphasize traditional education? Is it even realistic to expect young people to save money and not just spend it? What worked for you and what do you wish you had done differently?

Reply in the comments below with your thoughts, or if you’d prefer to respond directly or privately, reply to any of our emails or use our contact form.

P.S. If you’re interested, you can view the math behind this story here, or you can make a copy of the spreadsheet and mess with it on your own.

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