When you’re in your 20s, retirement seems like a lifetime away. But life happens fast. If you want to enjoy your golden years, you’ll need to have a plan in place.
Sure, you may have other financial priorities right now. But paying off your student loans or buying a house doesn’t have to prevent you from saving for the future. Here’s how to start planning for your retirement in your 20s.
1. Start Early
There are two words to remember when planning for retirement: compound interest. As your money grows, you’ll be able to reinvest in your retirement plan to make even more money.
“If you get started in your 20s, you can take advantage of the most powerful mathematical force known to man: compound interest,” says Ty Young, CEO of Ty J. Young Wealth Management
It’s understandable if you have other priorities at the moment, but putting aside just 5% to 10% of your income can help you get the ball rolling on your retirement plan, and compound interest will allow you to build wealth over the following decades.
2. Set a Goal
With inflation reaching record highs, many Americans are rethinking their retirement expectations. In 2021, Americans were expected to need $1.05 million to retire comfortably. Now, they are expected to need $1.25 million.
How do you know how much you’ll need? The simplest way is to add up all your expected living expenses for the year and then multiply by 25.
Alternatively, you can use the 4% rule. This simply means adding up all of your investments and subsequently withdrawing 4% for your first year of retirement. You’ll need to adjust each year for inflation, but the basic idea is you’ll need a total retirement account that allows you to withdraw 4% to cover your annual living expenses.
3. Make 401(k) Contributions
As of 2023, you’re permitted to contribute as much as $22,500 to your 401(k) retirement plan. The advantage is that these current contributions are not taxable, which means you can reduce your tax liability while making progress toward your retirement goal.
Additionally, if your employer offers a matching contribution, you should take full advantage of this program. Otherwise, you’re basically leaving free money on the table. This is especially true for employers who offer dollar-for-dollar matching contributions. Any money your employer offers can be a great way to jump-start your savings, especially when you’re in your 20s.
4. Set Up an IRA or Roth IRA
An Individual Retirement Account (IRA) is one of the most common forms of retirement savings. You’re permitted to save as much as $6,500 per year in an IRA, though you’ll need to choose between two types: traditional and Roth IRAs.
The main difference between an IRA and Roth IRA is how and when you receive a tax break. The contributions you make to a traditional IRA are tax-deductible, while the payouts you later receive are not. Roth IRAs are essentially the reverse: your contributions are still considered taxable income, but your later reimbursements are tax-free.
Which should you choose? It’s hard to say. A Roth IRA makes sense when you expect to have a higher income in retirement than you do at present. That actually may be true when you’re in your 20s — though the tax break of traditional IRA contributions may liberate you to invest in other retirement vehicles.
5. Look into Annuities
Annuities can provide some much-needed stability during your retirement years. An annuity is an insurance product that provides retirees with regular payments at the time the annuity matures.
Make sure to research carefully, though. Some annuities offer a lump-sum payment, while others provide monthly, quarterly, or annual payouts. Additionally, you should check for any administrative fees that might cut into your income.
That said, annuities can supplement your other retirement plans and increase your income during your retirement years. Furthermore, they offer less risk than other investing strategies without impacting your rate of return.
6. Stay Consistent
Remain consistent with both your strategy and contributions. If you miss one, you’ll also miss the opportunity for compound interest. In the end, a single missed contribution can cost as much as 10 times more over 30 years.
Retirement accounts administered by your employer can be great ways to consistently save for retirement. But you can also set up automatic transfers with your bank, so you never have to think about making a monthly retirement contribution.
It’s Never Too Early
According to the Wharton School of Business, 57% of older Americans expressed regret for not having saved more money. Don’t let that be you. As you create a budget, consider retirement savings and other investments. The trajectory you establish now can carry you into your future with greater confidence.
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