Your 20s can be an exciting, yet challenging time: you’re starting your career, chipping away at student debt and putting the pillars in place for your adult life. In the midst of juggling other financial priorities, you’ll want to get a jump on saving for retirement. While your target date for retirement may seem like eons away, there’s a clear advantage of saving for a nest egg now. Instead of putting it off, the earlier you can start saving for retirement, the better off you’ll be.
We reached out to money experts to glean insights on how to start saving for retirement in your 20s.
Save as Much as You Can
While it seems simple, people underestimate the power of saving more and starting earlier, says Matt Becker, certified financial planner and founder of Mom and Dad Money. The truth is that when you’re young, doubling your savings rate has a much bigger impact on your investment success than doubling your return.
“Nothing else you do has even close to the same impact for the first 10 years of your investment life,” says Becker. “If you want to be a savvy investor, the best thing you can do is stop trying to build the perfect portfolio. Instead, focus on finding ways to save more.”
Steer clear of lifestyle inflation, which is when your living expenses increase alongside your income, making it hard to save. Start by assessing your budget. Are there any ways you can trim your spending? For instance, can you slash your utility bills, or discover ways to eat healthy on a budget? If you’re feeling particularly ambitious, try challenging yourself to save $1,000 a month.
Start Small and Start Now
Start small and start somewhere, says Shannah Compton Game, certified financial planner, millennial money strategist and host of “Millennial Money Podcast.” Compton Game points out that because of the magic of compounding, making contributions to your retirement when you’re young will yield the best results.
For example, if you’re a 23-year-old and put $2,500 each year into a Roth individual retirement account (IRA) that earns a 6.8% average annual return, you’ll have $627,844 by the time you reach 67. However, if you wait until you’re 45 and sock away the same amount each year with the same annual return rate, you’ll only have accumulated $239,099. By starting now, even if it’s not as much as you like, your money will grow far more than if you wait, say five or 10 years.
Get the Full Employer Match for a 401(k)
“Aim to save at least as much as your employer’s retirement plan match,” recommends Kate Dore, owner and editor of Cashville Skyline. To make the case for giving enough in a defined-contribution plan like a 401(k) to get the full match, think of your employer’s retirement match as part of your salary. And if you neglect to do so, that’s money you’re leaving on the table.
This can easily be accomplished through setting up monthly savings automation. Start by contacting your workplace’s Human Resources department or financial institution to set this up. You’ll barely notice the missing cash.
Save on the Regular
Start by saving even $20 a paycheck, and consider setting up automatic transfers. That way you won’t even miss the money, suggests Compton Game. You can also save consistently by committing to saving a percentage of your raise or bonus. Another thing you can do is check to see how much you’ve saved each quarter. If you find that you’ve fallen short, see if you can shore up funds so you’re caught up. Then check in every so often to make sure you’re on track.
Focus on Earning Potential
Invest in your ability to earn more money, points out Becker. Learn new skills and enroll in courses that can lead to promotions and raises. Dedicate a percentage of your raise toward savings. This will also help you keep your standard of living low.
You can also rake in extra money through side hustling. Tap into your talents and skills to start up an Etsy store and sell crafty wares, or take a breather from your desk job to be a dog walker on Rover.com. You can put together furniture on TaskRabbit, or be a rideshare driver. There are also easy ways you can make money from home, such as taking online surveys.
Ignore Financial News and Stick to the Plan
To avoid making rash, emotionally driven investment decisions, Becker suggests pretty much ignoring all financial news.
“It’s designed to make you either greedy or fearful, both of which lead to bad decisions,” says Becker. “Instead, put your hard-earned cash and invest in low-cost index funds, and stick to your plan through the ups and downs. You’ll be much more likely to succeed than someone who’s constantly making adjustments based on the news of the day.”
Reduce Your Fund Fees
When it comes to choosing investments, pay close attention to fees, recommends Becker. Recent data from the investment research company Morningstar, reveals that fund fees are actually the best predictor of an investment’s future returns. For instance, from 2010 – 2015, the funds with expense ratios in the cheapest quintile were three times as likely to succeed as the priciest quintile. A quintile represents 20% of a given population. While it may seem counterintuitive, the less you pay in funds, the more you earn.
The best part about all of this is that cost is one of the few variables in investing that is something you have direct control over, Becker explains. While you can’t predict what the markets are going to do, you can control how much you pay in order to invest in stocks.
Align Your Spending With Your Values
While saving for retirement, also try to focus on squirreling away money for other long-term money goals. That way none of your major financial goals fall by the wayside. The key is making sure your spending is in step with your values, says Dore.
Do you want to pay off student loans? Save for a first home? Stash away future college expenses? Or build your retirement accounts?
“Whatever your goals are, chances are you’re regularly spending on much lower priorities,” points out Dore. “By diverting some of this cash, you’ll find you can make progress across multiple goals.”
While it’s quite a balancing act to juggle multiple – and oftentimes competing – money goals, make saving for retirement a priority now. You’ll be in a far better place financially if you start early, and won’t have to play catch-up when you’re nearing retirement.
Are you in your 20s and have questions about saving for retirement? Let us know in the comments below!
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