Just because you’re in your 20s doesn’t mean you can’t start socking money away for the day you finally retire. The challenge is that seldom do young adults make that a priority. Usually, these individuals are more focused on starting or growing a career, getting married, and raising a family.
However, when you consider the benefits of getting started on a retirement plan so young, it’s easy to understand why top financial advisors strongly recommend it. For starters, while still in your 20s, you have more time to maximize compound interest. As a result, even putting a small amount of money aside will eventually turn into a big reward.
Something else to consider is that while in your 20s, you probably don’t have a house yet, which equates to no mortgage. Even if you want kids, you’re likely still in the planning phase. Without the extra expense of a mortgage or financial means required to raise children, you’re in an excellent position to get a jump-start on saving for your retirement.
So, what’s the best way to start building substantial retirement savings while in your 20s? Consider these five tips.
- Don’t Delay Saving
When it comes time to start saving money for retirement, you’ll have no problem coming up with a ton of excuses. You have rent and other living expenses to handle. You have student loan debt. You’re not yet making a significant amount of money. While these things might be true, you can still put money aside.
Even $20 a month is better than none at all. Focus on saving a minimum of 10 percent of what you earn. Also, set up a reasonable working budget. By doing so, you can easily find extra money to put into a retirement account.
- Take Advantage of a 401(k)
If you’re in the market for a new job, look at companies with an excellent 401(k) matching plan. If you already work for a business with this option, sign up right away. Many organizations now match 100 percent, although anything is advantageous.
There are two benefits to this. First, the money you earn deposits directly into your 401(k). Therefore, the earnings you take home aren’t as heavily taxed. Second, you build your savings much faster than not participating in a 401(k). The money you put into your account will continue to grow tax-free until you reach retirement age. As a result, you’ll end up with a faster compound interest rate.
The goal is to contribute at least 6 percent of your monthly income. For a company that offers 100 percent matching, it will deposit $1 for every $1 you add to the account.
- Consider a Roth IRA
If you don’t work for a company that offers a 401(k), you can still put money aside for retirement by opening a Roth IRA account. In this case, the money you set aside is already taxed. Therefore, when you retire, everything in the IRA is tax-free. No, there isn’t any benefit of doing this from a tax perspective, but it works incredibly well for having money at retirement that you don’t owe any taxes on. With consistent savings, the money will add up quickly and you will have the benefit of lower taxes in retirement.
- Dare to be Aggressive
Stocks may be an extremely volatile type of investment, but in the long run, they pay off well. By putting a high percentage of your portfolio in stocks, you should have no trouble growing your money substantially. Remember, if you start investing aggressively while still in your 20s, you have more time to reach and even surpass your retirement goal.
If you’re not comfortable investing on your own, you should work with a reputable financial advisor. This expert can create a portfolio for you that consists of well-balanced investments. The advisor will look for a solution that puts you in the best possible position for retirement. At the same time, he or she will select investments with the right risk level, specifically for what you can tolerate. As you get closer to retirement age, you have the option of moving your assets into bonds or something else less volatile.
- Create an Emergency Fund
The one thing that gets people in their 20s in the most financial trouble is credit cards. While having one or two with a low balance that you pay off each month will help build good credit, too many credit cards or high balances put you at risk. If you have an emergency fund, you can rely on that money instead of charging.
For instance, with an emergency fund, you have the money needed for a new tire, to have a car repair done, or perhaps to have a tooth fixed if you don’t have dental insurance. For this type of savings, work toward putting at least six months of living expenses aside.
Keep in mind that instead of opening an ordinary savings account, choose one that yields high interest. By doing so, you’ll make more money on what you’re saving. Another possibility is to open a money market account. With an emergency fund, you won’t have to depend on a credit card to get you out of a bad financial situation or pull money from your retirement savings. For the latter, there’s a stiff penalty along with income taxes owed on the withdrawals, something you want to avoid.
Seek Professional Guidance or Create Your Own Retirement Plan
As mentioned, to get started on saving money for retirement while in your 20s, a financial advisor can offer you sound advice. This individual will come up with a plan that serves you best for when you ultimately retire.
Another alternative is to use retirement planning software made for consumers and create the plan yourself. The most accurate and detailed planning software on the market for consumers that we have found is WealthTrace. This software allows you to create a retirement plan where you can see just how important saving money early on is. You can run what-if scenarios on your savings, retirement date, and expenses. Running a sample plan on a young couple, I found that they can retire five years earlier just by saving $3,000 extra per year into their 401(k) plans.
So don’t delay. Start saving more today and make sure you have a retirement plan set up so you can see just how important it is to save early and often.