How to Save for Retirement in Your 20s
If you're in your 20s, is it too early to start saving for retirement? The answer is a resounding "no." Retirement might be decades away, but the sooner you start planning and saving for it, the better off you'll be. Think of it this way: If you start saving $4,682 per year at age 25, and the money you set aside earns about 7 percent per year, you will have $1 million by age 65. If you wait until your 30s to start saving, you'll need to save twice as much for retirement each year to earn the same amount by age 65.
What you do to save for retirement when you're 22 or 25 can be considerably different from what you do to save when you're 35, 50 or 60. Planning for retirement can seem daunting, especially when you're young, but getting into the habit of saving now will make things a lot easier in the future.
Talk to a Wealth Advisor
Talking to a wealth advisor about your retirement options when you're in your 20s can help you put together a big-picture plan for the future. Since retirement advice differs based on your age and how close or far away you are from actually retiring, working with an advisor can help you figure out which options best meet your needs at the moment.
You may be overwhelmed by conflicting advice or strategies designed for people at one stage of their lives but not at another. An educated and experienced advisor can help you understand the difference between prevailing wisdom and what works best for your stage of life.
Make Your Retirement Contributions Automatic
Having your retirement contributions automatically set aside will make saving for retirement painless. If your employer offers a 401(k) plan, you can have a set amount of your paycheck taken out and deposited into the plan each pay period. You'll never see the money in your check or direct deposit, so you won't think to miss it. You can also schedule automatic transfers into an individual retirement account (IRA), so that you don't have to think twice about saving money.
Don't Limit Yourself to Employer-Sponsored Plans
A 401(k) or similar plan gives you an easy and straightforward way to set aside money for retirement. In some cases, your employer might even match the contributions you make, increasing the benefit of the plan. But don't feel that your 401(k) is your only retirement option. If your job doesn't offer any type of retirement plan, don't worry that you won't be able to save for retirement.
There are other options for retirement savings, such as a traditional or Roth IRA. A traditional IRA allows you to make pre-tax contributions (meaning you'll pay tax on them in the future), while the contributions you make to a Roth are after tax (meaning you've paid the tax and can withdraw the money tax-free in retirement). Depending on your income and the plans your employer offers, you might be able to contribute to either a traditional or Roth IRA in addition to your employer's plan. You're allowed to contribute up to $5,500 per year (as of 2017) to your IRA, either a traditional or Roth or some combination of the two.
Understand Investment Costs
One thing to be aware of when you're starting to save for retirement is the actual cost of certain investments. Some mutual funds and other investment vehicles have a variety of fees. Your 401(k) should have a fee disclosure, which tells you how much you're paying and what your expenses are in comparison to your investments. The fewer fees you pay, the more of your money you get to keep. If you have any questions about how certain expenses or fees will affect your savings over time, you can ask your advisor.
As long as you have earned income, it's not too early to start planning for and saving for retirement. There's no one-size-fits-all solution to retirement savings, which is why working with a trusted advisor like Nicholas Wealth Management to put together a plan that fits your current needs and plans for the future is the smartest way to go. Schedule your free consultation today.
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