Retirement is probably the last thing you’re thinking about in your 20s. After all, your retirement is still decades away. This is the main reason people avoid saving up for their golden years. If you’re in your 30s or 40s, you might be more concerned with getting a house and starting a family than saving for retirement.
Anyone approaching retirement age will tell you that the years fly by and that it is harder to accumulate a sizable nest egg if you don’t start early. However, the earlier you start saving for retirement, the more time it will have to grow, and even a little bit of extra time can make a significant impact.
Start Early
When you’re in your twenties, your income is likely quite low. Your already limited funds need to compete with a variety of expenses. However, this is also the perfect time in your life to start making investments for the future. Compound interest will do a lot of the work of creating a nest egg for you if you save even a tiny bit in your twenties. You may also be eligible for tax benefits and company contributions if you save money in a retirement plan. If you make these financial decisions in your twenties, you will have a far better retirement.
Here’s why you should start making investments, no matter how small. Let’s say you put $1,000 into a safe long-term bond that pays 3% interest annually. Your investment will increase by $30, or 3% of $1,000, at the conclusion of the first year. You currently have $900. But if you make 3% of $1,030 the next year, your investment will increase by $30.90, which is a modest but noticeable increase. Compound interest offers the greatest results the longer your wait. After 30 years, that $1,000 grows to $2,427 without you making a single contribution. Imagine what it would be with regular and even larger deposits.
Save Automatically
Have a small portion of your paycheck deducted automatically from your paycheck and placed into a 401(k) plan if your employer offers this benefit. You can set up a direct payment to an IRA, Roth IRA, or even a savings or investing account if your employer doesn’t offer a 401(k). By automating this process, you can avoid the temptation to spend the money elsewhere.
A 401(k) is one of the strongest wealth-building options accessible if you’re in your twenties and saving for retirement. The Internal Revenue Service (IRS) tax code’s section 401(k) serves as the foundation for the 401(k). It enables you to invest in a retirement account without paying taxes on the gains until you reach retirement age. The only way to access a 401(k) plan is through an employer. A portion of your salary is deducted from every paycheck as contributions. Up to a specific amount, the firm might match your contributions.
Alternatively, you could opt for an Individual Retirement Account (IRA). Many IRA restrictions are similar to 401(k) rules, but IRA contribution limitations are lower. Even while the maximum contribution for 2022 is only $6,000 per year, or $7,000 if you’re 50 or older, there are still some clear benefits. Almost any stock, bond, ETF, or other traditional investment can be invested in.
You have much more influence over how your money is invested with IRAs because they don’t have to go via your company. You may also invest in both a 401(k) and an IRA.
Take Advantage of Tax Deductions
You can put off paying taxes on your contributions and gains if you choose a tax-deferred retirement account, such as an IRA or 401(k). Over several decades, a greater untaxed amount can have a significant impact since it will result in a larger sum of accumulated money.
For young people in low tax brackets, Roth IRAs are an especially great deal. Your current low tax rate is locked in when you contribute after-tax money to a Roth IRA. Each year, the money in the account grows tax-free, and withdrawals made in retirement from accounts at least five years old will be tax-free.
Start an Emergency Fund
Money saved in a retirement account should ideally be utilized for costs in your sixties or later. Unexpected life circumstances, on the other hand, can devastate your finances. In most circumstances, you cannot remove funds from your retirement accounts without incurring a significant penalty. You may be allowed to borrow from your 401(k), but you must repay the funds.
An emergency fund separate from your retirement accounts is vital for covering unexpected expenses. It’s a good idea to save three to six months’ worth of living expenses. This also allows your retirement savings to grow without penalty or interruption.
Think Ahead
There’s no getting around it: the stock market will fluctuate, and inflation will occur. Whether you’re purchasing a new shirt or a car, the same thing will almost certainly cost more in five years.
Some low-risk investments may fail to keep up with inflation, which means that even if your money is stable, you are effectively losing money because it will no longer cost as much in the future. Remember that you’re playing the long game with your retirement planning, and the stock market has traditionally recovered following turbulence.
Investing for retirement is more than just putting money aside for later—it’s about growing your money.
The technique of gaining interest in investments is known as compounding. Because of compounding, saving early and regularly can result in huge long-term advantages.
The key to accumulating retirement wealth is to begin saving as soon as possible. You don’t need a lot of money to get started. Because you have decades until retirement, and a tiny monthly contribution can add up to big earnings over time.
Remember that saving for retirement is more than just putting money aside for later—it’s about helping your money grow. Whatever your age or stage in life, our experienced team can help you find the long-term retirement approach that’s right for you.