4 Tips For Saving For Your Retirement In Your 20s
If you’re in your 20s, you’re probably thinking you’re too young to start saving for retirement. But the truth is, you should start saving for retirement as soon as you can. The sooner you start saving the more time your savings will have to grow. Starting young can make an especially big difference because of compounding, a phenomenon during which each year’s gains are able to generate their own gains. Unfortunately, many of the youngest people in the workforce don’t save for retirement early. Here are a few tips for saving for retirement while you’re in your 20s:
Start saving as soon as possible.
There are many reasons that young people put off savings. Perhaps you’re struggling to cover rent or pay off student loans. While these circumstances may make funding a 401(k) challenging, it isn’t impossible. Your early 20s are your prime years to save for retirement. If you don’t start saving early on, you’ll regret it. This will set you back in terms of retirement planning.
According to a study conducted by Hewitt Associates, workers between the ages of 18 and 25 usually invest about 35 percent of their retirement savings in bonds. In the past, bonds have returned 5.4 percent per year, which is just ahead of inflation and right around the risk-free rate. According to Ibbotson Associates, stocks tend to grow at an annual rate of 10.4 percent. Instead of investing 35 percent of your savings in bonds, you should invest about 90 percent of your investments in stocks. If you’re in your 20s, you have a long horizon ahead of you and will be able to handle the ups and downs of the market.
Sign up for a 401(k).
When you set money aside for savings, put them to good use. You need to invest them in a way that can help your assets grow at the fastest rate possible. The best place to start is with a 401(k), if you’re eligible to participate in one at work. A 401(k) is helpful for a number of reasons, but the top reason is that the majority of employers match your contributions as an incentive for you to participate. The only catch is that sometimes you need to save a certain amount of money for them to match your contributions.
If you don’t have a company retirement fund, use a Roth.
Perhaps you aren’t eligible for a retirement fund that gets you matching funds. The next best option is a Roth IRA. This is funded by money that has already been taxed in your normal paycheck. However, withdrawing money from a Roth IRA later is tax-free. Make sure you get in the habit of saving by using automatic deposits. Each month or every few weeks, have a portion of your paycheck or bank account payments automatically deposited into the Roth.
Saving for retirement may seem like something you don’t need to worry about, but the earlier you save the better. Your early twenties are the perfect time to save for retirement. If you follow these tips, you’ll be able to save for retirement while still paying your other expenses, and your savings with grow rapidly.