Retirement is a long way away when you’re in your 20s. Still, the decisions you make at the beginning of your working years can have a huge impact on your retirement. Why? Because money you save early on has the biggest accumulation potential. Our advice? Save as much as you can without sacrificing fun, and put it away in tax-advantaged and low-fee investment vehicles.
Here are some tips to help get you planning for retirement in your 20s:
- Begin saving at least 10% of your salary – though if you can scrape 15% together that’s even better! If you’re not saving regularly, you’re missing out on tax incentives and the power of compounding interest.
- Look into employer plans, like a 401(k) or something similar. That’s the best place to start when it comes to saving. If your employer doesn’t offer some sort of workplace plan consider a Traditional or Roth IRA and contribute the maximum. Company matches and tax-deferred vehicles are a great foundation of retirement planning.
- Understand the difference between a Traditional and Roth IRA. Traditional IRA contributions are made with pre-tax savings, and then distributions you take in retirement are taxed at your ordinary income tax rates applicable at that time. Roth IRA contributions are made with after-tax savings, such that your distributions in retirement are not taxed. Deciding which is best for you requires comparing your tax bracket today with your expected retirement tax bracket so that you pay taxes when your tax rate is lower. Roth IRAs are typically a good choice for younger people while their income is lowest, and also because those with higher incomes are not eligible.
- Find a simple and low-cost investment plan. A simple, streamlined investment portfolio is easier to manage and less likely to yield major problems. All you need is a diverse, low-cost index mix of stocks and bonds that line up with your risk aversion and your investment timeline. In your 20s that mix will look something like 90-100% in stocks and 0-10% in bonds.
- Relax a bit. If you’re saving regularly and investing simply and smartly, then you’re doing your part for this decades. All you’ve got to do is check in from time to time and keep an eye on your progress.
Our Retirement Planning Guide covers the basics and makes it easy to start preparing at any age.