Let’s face it… retirement planning in your 20s seems premature. However, by switch your mindset to ‘wealth building’, you can set yourself up for financial stability later in life.
It’s never too early to start saving for retirement. But when you’re in your 20s, your focus is usually advancing your career, not planning for the end of it. However, being young is a massive advantage when it comes to building wealth for retirement because it gives you time to maximize your saving potential.
Here are four tips for boosting your retirement savings in your 20s.
The sooner you start saving for retirement, the better it will be down the road. So where do you begin? Be sure to start with realistic expectations, milestones and goals.
Using an online financial calculator can give you a rough idea of where you stand and what initial steps you need to take to get the ball rolling. These financial calculators predict your retirement nest egg in today’s dollars, then shows how it would stretch over the years you plan to spend in retirement, taking inflation into account. You can then make adjustments in the basic settings to reflect your current situation.
Hiring a financial advisor to help you out (especially if you don’t have the know-how to navigate the process of retirement planning) could prove beneficial when starting out.
Managing debt in your 20s is crucial for the outcome of your financial future. Unfortunately, many millennials and Gen Z-ers fall victim to credit card debt. This type of debt comes with high interest rates and a small minimum balance that needs to be paid every month, keeping you on a paycheck-to-paycheck lifestyle and unable to save.
Paying off the highest interest debt is crucial, but past-due balances can affect your credit and financial well-being for years. If you’re delinquent on any of your debts or you have accounts in collection, work on paying those off before you take any other steps to invest or pay off other debts. Collection accounts can hurt your credit as long as they remain on your credit report. The faster you can get current, the better.
It’s also a good idea to open a high-yield savings account to start building your emergency savings. This will provide you with a favorable alternative to credit cards when money gets tight.
To explain why your 20s are so important, let’s talk about a little phenomenon called compound interest. With compound interest, any interest accrued earns interest on itself…
Compound interest rewards you for not only the actual dollars you invest (your principal), but also on what those dollars earn (your interest):
Say, for example, you put $5,000 into your retirement account every year starting at age 25, up until you retire at 65—a total contribution of $200,000 over 40 years. Thanks to the power of compound interest, history shows you could end up with almost $1.1 million in savings. Sounds unbelievable, right? Well actually, it’s very possible if you just start early.
One of the easiest ways to save for retirement is to open a retirement account, or if you have the option to through your employer, start contributing to your 401(k).
The 401(k) is based on section 401(k) of the IRS tax code. It allows you to invest money into an account earmarked for retirement without paying taxes on the gains until you reach retirement age.
If you’re eligible to participate in a 401(k) at work, do so. Some employers match your contributions to encourage your participation. 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.
The bottom line is, the sooner you begin saving for retirement, the better. A comprehensive financial plan can help you make the right investment decisions and prepare for retirement.
At CKS Summit Group, our retirement plans are customized to your individual circumstances and needs. If you feel overwhelmed at the prospect of building the right retirement plan for you in your 20s, we’re here to help you to make a plan that will set you up for long-term success throughout retirement.