It’s never too early to start saving for retirement. In fact, if you start in your twenties, you can put away much less each month and still have a healthy nest egg saved by the time you reach retirement age. If you don’t start putting it aside now, you may need to save significantly more to make up for it down the road.
So if you want to be able to retire comfortably someday, it’s best to get started as soon as possible. Here are some tips on how to save for retirement in your twenties.
The Power of Compound Interest
One of the most important reasons to start saving for retirement in your 20s is the power of compound interest. Compound interest is when you earn interest not only on the money you deposit into your savings account but also on the interest that has already accumulated. This means that your money grows exponentially rather than simply linearly.
Over time, compound interest can add up. For example, you have $10,000 in savings and earn an annual rate of return of 5%. In year two, you would have $11,025 because you would earn interest on the initial $10,000 and the $500 interest accrued last year. In year three, your balance would grow to $11,576 because now you’d be earning interest on the initial $10k and the $525 from year two. And so on.
If you have a stable job now, it’s worth it to start saving for retirement now, as you’ll be taking advantage of the power of compound interest over time. You can set aside around 10-15% of your pretax income and let compound interest do the rest.
Saving Now vs. Later
Another reason it’s important to start saving for retirement in your 20s is that later on down the road, you’ll likely have more financial obligations than you do now. Once you enter your 30s and beyond, chances are good that you’ll have more bills and responsibilities such as a mortgage, car payments, or even kids.
By starting now, you’re taking advantage of the fact that your expenses are currently relatively low, and you don’t have as many obligations to worry about. Plus, the sooner you start saving for retirement, the more time your money has to grow. If, for example, you invest $10k at age 25 and earn a 7% return, you’ll have about $78,000 by the time you reach 65. However, if you wait ten years to start investing, you’d only have about $46,000 saved
Ultimately, it’s never too early to start saving for retirement. Even if you can only put away a small percentage of your monthly income, it’s still worth doing. Suppose you don’t start saving now while your income is relatively high and your expenses are relatively low. In that case, it will be much harder to catch up later on down the road when your circumstances have changed.
Where to Invest for Retirement
Once you’ve decided to start saving for retirement, the next step is figuring out where to invest your money. Investing lets you earn returns on your money, which is the key to building healthy retirement savings. When investing for retirement, you have two main options: employer-sponsored retirement plans such as 401(k)s and traditional or Roth IRAs. There are also other options, such as investing in stocks and mutual funds. Still, these should be discussed with a financial advisor.
Employer-sponsored 401(k): Employer-sponsored retirement plans are a great option for those who want to save for retirement but don’t want to risk investing in the stock market. With employer-sponsored plans, you can designate a percentage of your paycheck to go into the plan. The amount will be deducted from your salary before taxes.
If your employer offers a 401(k) retirement plan, you should take advantage of it. Many employers will match your contributions to a certain amount, essentially free money. Plus, with a 401(k), you can invest in different mutual funds, which are professionally managed and designed to help you maximize your returns.
IRA: You can also open an IRA, or Individual Retirement Account, on your own. IRAs offer tax advantages since the money you contribute is generally deductible from your income taxes. Traditional or Roth IRAs are great options for those who want to invest for retirement. With these plans, you can choose how much you want to put in each month and where you’d like to invest it. You can also change your investments anytime and have more freedom to decide about your money.
Direct Investing: This can be a great way to start investing smaller amounts since you don’t have to pay a commission or management fee. Plus, it allows you to actively manage your investments and build your portfolio tailored to meet your goals.
No matter which option you choose, it’s important to do your research before investing any money. Make sure you understand the risks associated with each option and ensure you’re comfortable with any potential losses before putting your money to work. With that said, the important thing is that you start today—the sooner you start saving for retirement, the more time you’ll have for your money to grow!