One of the biggest financial faux pas made by millennials today is not saving enough for retirement. You might think “I have plenty of time to save, I don’t have to start now” – but that is actually the opposite of how you should be thinking. I see this every day on my own site, where investing and retirement related topics get the lowest click thrus and shares on social. People just aren't interested in talking about how to save for retirement in your 20s, but I really want to change that.
Why Start Now?
Most retirement accounts – such as IRAs and 401(k)s – grow through compounding. Compounding interest means that you earn money based on the amount that is in the account each year, including the interest that has been added in previous years. That means that the longer that your money is in the account, the more time it has to grow.
So by starting your saving early, you’re setting yourself up for major growth. 38% of retirees say that if you wait until your 30’s to start saving, you’ve waited too long.
How much do you really need to save for retirement in your 20's?
The first thing you should do when planning your savings strategy is figuring out how much you will need to retire.
There are a wealth of retirement calculators out there that will help you learn how much you should expect to save to replace your monthly income. We recommend NerdWallet’s retirement calculator to help you figure out how much you should save monthly, and LearnVest’s lifestyle calculator to help you learn how much you should expect your lifestyle to cost.
Remember that your retirement savings are meant to replace your income once you leave your job. So plan to save enough to cover your lifestyle (whatever that looks like!) in retirement. Will you be traveling the world? Or staying at home working part-time? Consider this when calculating your retirement costs.
How Can I Start Saving for Retirement?
Your first stop should be at work (if you work in a traditional office) and see what types of retirement saving options they offer employees.
But saving on your own is possible too and you can open an account in as little as 10 minutes. With new robo-advisors and increasingly digital nature of financial information and apps, you can do it all online and it's easier-to-understand and more visual than ever before. We like TradeKing and Betterment for our financial and investing needs. TradeKing and Betterment for our financial and investing needs.
Yes, those are affiliate links – but they're also just really neat tools. Read our TradeKing review and tutorial for getting set up here.
What if I can't make that? How much should I save now?
According to NerdWallet, you should try to save 2x the amount of your annual pre-tax salary by the age of 35. So if you make $40,000 a year pre-tax, try to have $80,000 in your retirement savings by the time you’re in your mid-30’s. This will help your money grow to its fullest.
CNNMoney also has a super-handy graphic showing how much you should have saved by age 25 depending on your income. Check it out!
Another rule of thumb would be to try to save 15% of your monthly income. This can either be post-tax (if your employer doesn’t offer a 401(k)) or pre-tax (try setting up automatic debits from your paychecks!)
Think about how to maximize your contributions?
There are plenty of ways to increase your investment contributions. One of the easiest is to set up automatic debits and contribution increases. If your employer offers contribution matching, make sure that you are contributing enough to earn the match. Don’t leave free money on the table!
You should also learn more about how 401(k) or IRA contributions are invested, and how to diversify your stock allocations.
And last of all, don’t be afraid to talk to a professional. Experts at investment firms like Fidelity can help you create a retirement plan that works for you.
Since as long as you can remember, people have been asking you about your future. What will you be when you grow up, where will you go to college, and when will you retire. One thing required for all of those things is money. If you read about personal finance online, it can seem like every, single website is telling you to “Save for retirement” and “start investing.” We know that advice is great, but how are you supposed to do that when you barely have enough money to live?
Investing in your 20's can seem scary and overwhelming, and worse yet like something we have nothing but time to do. Investing isn’t as difficult as you think, and though you have more time that doesn’t mean you should wait.
How to Save for Retirement in Your 20's – 6 Steps for Success
Step 1: Sign Up For 401k And Get Company Match
Call or go to your HR department and they will gladly help you through the process. Most companies have an online option (something all we 20 somethings appreciate).
It may be that your company plan has high fees so you don’t want to put all your investments in. If that’s the case at least invest enough to get the company match. A company match is essentially free money, or rather money you’re owed. Don’t cheat yourself out of money you’ve earned.
Step 2: Max Out Tax Deferred Plans
For 2017 the maximum contribution to a 401k is $18,000 allowing you to lower your taxable income.
If the fees are too high you can do two things. First, you could go to your HR department and ask them to switch the investment company to one that has lower fees. That does work but not always.
The second and easier option is to simply open your own plan at an investment firm. Fidelity, Charles Schwab, etc. You won’t have the ease of having the money come out of your paycheck automatically but you will have the tax savings.
Step 3: Educate Yourself
The person who cares most about your money is you so make sure that you are as educated as possible. An advisor can help but can be expensive and won’t care about your money as much as you.
Books are a great way to educate yourself. Go to the finance section of any bookstore and you’ll see “investing for dummies” and the like. Some books I recommend are The Little Book Of Common Sense Investing, and MONEY Master the Game. There are a ton of others but those two are the best in my opinion.
Podcasts can be invaluable as well. Many finance bloggers have started finance podcasts and talk about investing, getting out of debt, and the like. Cherry pick the episodes on investing and you can learn a lot in a little amount of time.
Step 4: Open Taxed Investing Accounts
Once you have saved the maximum in your 401k you’re not done there you will need to open another account. You may even be able to open them at the same place your tax deferred account is making it simple to keep track of everything.
You may go to a different broker so you don’t confuse yourself or “mix” the accounts. It’s your preference but for me, I like having everything in one place.
Step 5: Buy Index Funds
I am not an investing genius but I know that Warren Buffett is. So I take very seriously what he suggests for people to do, and what he wants to be done with his money when he dies, investing in index funds.
An index fund put simply is a fund you buy that owns a large portion of the stock market in smaller amounts. So instead of buying a stock of Google, Apple, and Snapchat, you buy an index fund that includes those in the fund.
These work because of how simple they are, they don’t work fast, it isn’t exciting but it’s the best way to grow your investment in the long term.
Step 6: Have Patience
We get instant satisfaction from our phones, our games, our everything. It has become more and more difficult for people to wait for anything. So it’s important to note, especially in your 20’s, that investing will take time.
You will start investing now, and you won’t touch that money for decades. You will live a long life, have many jobs, a marriage, kids, all before you start to withdraw your investments. Yes, you can do it earlier and some do but the longer you hold on to it the richer you become.
Editor's Note: This post was originally published on April 3rd, 2017. It was updated on August 10th, 2018.
Like this post? Share on Pinterest