Forget YOLO – saving for retirement in your 20s is pretty important.
While retirement may be at least 30 years away, taking advantage of your youth is the perfect way to make sure you have enough money when you do stop working. If you want to be able to afford the finer things in life – like trips around the world – when you’re older, acting now will save you a lot of heartache down the line.
Retirement Isn’t the Goal
This sounds weird to say, considering the premise of this article is about saving for retirement, but retiring really is not the goal. The goal is financial freedom.
Setting aside money for the future gives you the option to leave your career if you want to or to be able to work on things you love without feeling like you must do a job for the money.
The cool thing is that when you set aside money for retirement, you’re benefiting in a few ways. First, you may have fewer expenses during retirement since you’re used to spending less during your working years. Second, contributing to certain retirement accounts can help you save on taxes, allowing you to save more of your money.
Kate Dore, a virtual planner and candidate for CFP ® certification, understands that paying off any student loans can seem more important. “It’s understandable that student loans can feel overwhelming,” says Dore, who’s working to become a certified financial planner. “But aggressively paying down loans could mean missing out on tax breaks, employer matches (free money!) and 30-40 years of compounding returns.”
The point is that saving can help you move toward the lifestyle you want, without really having to worry about money. If you think that you need a lot of money to start saving for retirement, think again.
“Thanks to the power of compounding, money invested in your 20s is a lot more powerful than” money invested in “your 30s, 40s or 50s. Even small amounts can make a big difference over time,” Dore says.
You Have Options
There are lots of ways to start investing in your future, but you don’t need to do all the things. Instead, consider some of the following ways to start contributing to your retirement now.
Take Advantage of Employer Retirement Plans
If your employer offers a 401(k), take advantage of it. Most employers will match your contributions up to a certain percentage of your paycheck to encourage you to sign up for a plan. The cool part is that the money is deducted from your paycheck automatically, so you may not even miss it. Plus, the money is put into your plan before it’s taxed, saving you money. You may be paying less in taxes because your 401(k) contributions will help reduce your taxable income.
If you don’t feel like you can contribute a lot, you can start saving a small percentage of your paycheck and increase the amount each year.
Open an IRA
If your employer doesn’t have a 401(k), consider signing up for your own retirement account. There are Traditional and Roth IRAs, with the main difference being that the Roth IRA is after-tax money, whereas a Traditional IRA is funded with pretax money. The IRS limits how much money you can contribute each year, so make sure you check to see what that is.
To help you save on a regular basis, you may want to have part of your paycheck automatically deposited into your IRA each month.
Don’t Neglect Debt and Emergency Savings
Yes, you want to save as much as possible, but don’t do it at the expense of having an emergency fund or paying off any student loan debt. Having an emergency fund could help you if life happens, like you lose your job or get a flat tire. Setting aside $20 at a time will help.
As for the student loan payments, consider an income-based repayment plan if you have federal loans. This caps your loan payment at 10% of your income. You can use the extra cash for your daily expenses and put some toward a retirement account.
You Can Change Your Contributions
Just because you’ve figured out how to save for retirement now doesn’t mean your plan will stay the same. As time goes on, any student loan debt could go down, and your income could go up. If this happens, you can consider increasing your retirement contributions.
As well, when you’re younger, you can be riskier with your retirement savings because you have time on your side. As you get closer to retirement, you may want to be a bit more conservative, such as putting more money into bonds, so your investments don’t fluctuate as much.
At the end of the day, your best bet is starting to save early. It doesn’t matter what the amount is, it’s more important that you’re making retirement contributions. As for how to allocate your retirement funds, you may want to do research or speak to a financial professional to understand the best options for you.
What ways are you saving money while in your 20s? Let us know in the comments below.
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