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 NEED 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!)
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.
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