Probably the last thing on a 20-something’s mind when starting a new job is saving for retirement. So many other financial goals seem more pressing—buying a house, starting a family, paying for education. And let’s face it. Retirement is at least 40 years down the road. That should be plenty of time to put something aside, right? Not necessarily. Here’s why starting early is important.
Although your disposable income in your 20s might be going toward paying off student loans, preparing for a wedding, or even paying rent, it is important to put aside at least a little for the future. The reason for this is the power of compound interest. The younger you are when you start saving, the more “free” money you will have earned in a modest account after 40 years.
Experts recommend putting aside a tenth of your paycheck. It might seem painful at first, as you examine your budget (you have one of those, right?) to see where you can cut a few corners. But, if you start saving right away, it will become a habit, and you won’t even miss the deductions after a while. If you do, just remind yourself how good life will be when you don’t have to work anymore.
Find the Right Account
Obviously, the easiest way to save for retirement is by making use of your employer’s 401(k). Many employers make your contributions to whatever you contribute. More free money! Using their 401(k) is in their interest, because it will keep you invested as an employee to keep the fund going. (However, make sure you roll over the account to a new one if you do end up leaving the company.) A 401(k) also deducts your contribution before it’s taxed, which will mean less of your money is taxed in your current paycheck.
Find out as much as you can about your employer’s matching program, if they have one. They may have a cap on their contributions, so do your best to reach that cap and make the most of what they are putting in for you.
If your employer does not have a 401(k), you can still get some of the benefits if you put away money into the right kind of account. This is what a Roth IRA is all about. The only difference is when you pay tax on the money. You can even have money automatically deducted from your pay into your Roth. Since a Roth is considered a tax shelter, you will be paying tax on your contribution as it comes out of your paycheck. However, when you need to withdraw at retirement no taxes will apply. There is a maximum you can save per year in a Roth, but anything you can put in is a benefit since it is tax-free.
Although a person in their 20s might want to lean conservatively and stay away from the stock market, this could be the best time to invest. When you are investing in stocks over the course of many years, your investments will see many highs and lows, but should in the end wind up on the plus side. Choosing consistently stable stocks is key. Also, keeping a diverse portfolio helps to ensure profit even in down times. Mutual funds are another way to keep your investments spread out.
It’s almost impossible to avoid debt completely, especially if you are expecting to buy a home and maintain a mortgage. But unnecessary debt, such as credit card debt, is money that could be used towards your future savings.
It’s a good idea to keep an emergency fund of several months’ salary in an accessible account. That way, if something unexpected comes up – loss of a job, car breaking down, etc. – you won’t have to go into your retirement fund to pay for the expenses dropped into your lap.
Retirement can be a stressful time or an enjoyable time. If you are picturing living life to its fullest at retirement, it’s going to take some early planning. The good news is, the earlier you start, the less you have to worry later, and the better it can be.