It’s easy to understand why saving for retirement isn’t a priority in your 20s — a decade when advancing your career, not planning for the end of it, seems more important.
But youth is a huge advantage when it comes to building wealth for retirement because it gives you time to maximize the power of compound interest. With compounding, you can save a little now and reap big rewards later.
Check out this compound interest calculator to see how you can build wealth over the long haul.
And in your 20s, you may not have a mortgage to pay or a family to support, so saving is easier.
Don’t pass up the opportunity to get a jump-start on saving for retirement. Here are five tips for maximizing retirement savings in your 20s.
1. Start saving today
You can probably find plenty of reasons not to save money. Funding a 401(k) seems impossible if you’re struggling to pay off student loans or cover your rent.
But letting expenses become an excuse is a mistake. The longer you put off saving, the more it will set you back in the long run. Take a close look at your budget and look for areas where you can cut your spending. Try to save at least 10 percent of your income.
Check out these tips for saving more money.
2. Sign up for your employer’s 401(k)
If you’re eligible to participate in a 401(k) at work, do so. Most employers match your contributions to encourage your participation.
When you sign up, the money you save is automatically deposited into the plan before it’s taxed, so less of your income will be taxed now. That saves you money, too.
Contribute as much as you can and try to take full advantage of your employer’s matching contribution. For example, if your employer contributes $1 for every $1 you save, up to 6 percent of your pay, do your best to contribute 6 percent.
But don’t leave yourself strapped for cash. In 2018, the maximum pretax annual contribution is $18,500.
This 401(k) calculator shows you how much you’ll save at various contribution rates.
3. No 401(k)? Open a Roth IRA
If you aren’t eligible for a retirement fund at work that gets you matching funds, sign up for a Roth IRA. You’ll fund it with money out of your paycheck that’s already been taxed, but when you withdraw the money in retirement, it will be tax-free.
This year, you can put up to $5,500 in a Roth. If you can’t save the max, save what you can; it will add up.
To make sure you stick to saving, have a portion of your paycheck automatically deposited into the Roth on a regular basis.
4. Be aggressive with your investments
Put a high percentage of your portfolio in stocks. When you’re in your 20s, you have a long investment horizon, so you can handle the ups and downs of the market.
Check out this asset allocation calculator to create a balanced portfolio of investments that fits your time horizon and risk tolerance.
Instead of picking individual stocks, look to mutual funds or exchange-traded funds, or even a target-date fund, to diversify your investment portfolio.
5. Build an emergency fund
Start building an emergency fund so you don’t have to rely on credit cards, or worse, your retirement savings, for unexpected expenses such as a car repair. Ideally, you’ll save up to six months’ worth of living expenses.
Set up automatic deposits to a high-yield savings account to stay on track. Having emergency cash in an easily accessible savings or money market account could keep you from dipping into your retirement funds if your car breaks down or you suddenly need a new computer. If you withdraw money from a retirement account too soon, you’ll be taxed heavily.