Purse Ho
Adult life is limited by your 20s on one side and your retirement on the other. It can be hard to imagine the latter from the former’s perspective, but what you do at kick-off will have a big say in your condition at the finish line.
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If you don’t save for retirement in your 20s, you won’t start until your 30s, if ever. In the modern age, where saving and investing are accessible to the masses, regardless of budget, there is simply no excuse for giving up an entire decade of compound growth.
If you’re young, it probably seems early to think about retirement, but it’ll be late before you know it — here’s how to start in your 20s.
Change your perspective on long-term saving
If you’re young and just starting out and feel like retirement is a distant concern, that’s because it is. Talking to older people about how fast it goes and how they wish they had started sooner will never make paying rent any less immediate if you’re young and broke. So instead of thinking of it as saving for retirement, think of it as buying choices — so that a future version of you doesn’t still have to struggle to pay the rent decades from now.
“Young adults in their 20s who are just starting their working life may struggle to identify with retirement and find the motivation to save for it,” said Tanya Peterson, vice president of branding for Freedom Financial. Network. “However, they can relate to the idea of options – options to do whatever they want in life whenever they want.”
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If you can only be one thing, be consistent
Don’t get distracted by focusing on a fixed goal like saving $100 a month. Instead, focus on setting aside a portion of your income on a set date and never missing it, no matter how little you have to contribute. You have all the time in the world to accumulate your contributions, but if you don’t make a habit of saving now, you probably never will.
“Many experts suggest 10%,” Peterson said. “Others suggest 20% to 25%. Either way, do it consistently. Even if it’s only a small amount at this stage, people in their twenties will be well served to get into the habit of saving regularly.
Cultivate your credit to make saving possible
Most people in their twenties simply won’t have a lot of money to build a nest egg, but they can build a solid financial foundation by building up their credit. If you blow up your credit in your 20s, you’ll spend your 30s rebuilding it while settling for expensive loans or postponing dreams like owning a home, making it nearly impossible to save for retirement. Follow this path and you’ll stumble upon middle age with bupkis before you know it.
“If you’re working to build a retirement nest egg, building your credit score is imperative,” said Michael Broughton, co-founder and CEO of Perch, a credit-building app backed by Jay-Z. “Adequate credit allows potential buyers to purchase homes at a fair interest rate and with a reasonable down payment.”
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Automate your nest egg: save it before you see it
One of the big keys when you’re just starting out is to get in the habit of cutting out a portion of every paycheck and turning it into savings before it hits your checking account – checking accounts are where the savings will die. This kind of financial automation isn’t hard these days, and it forces that all-important consistency.
“Many banks and credit unions today allow you to arrange an automatic withdrawal from your checking account to a savings account,” Peterson said. “See if your employer can automatically deposit part of your payment into your savings account.”
Prioritize jobs with 401(k) and when you find one, maximize it
In the post-retirement era, there’s simply no better way to get an early jump on savings than by participating in an employer-based 401(k) that provides a company counterpart. If you’re just entering the workforce or looking for a job in your 20s, value a 401(k) plan as much as a good salary. If you already have a 401(k), make the most of it by maximizing the percentage your business will match at almost any price except eviction.
“If a young person has access to a 401(k) at work, they should take advantage of it and start saving today,” said David Frederick, director of customer success and advice at First Bank. “This young person should invest at least enough to maximize any match with an employer.”
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If you go alone, go Roth
If you don’t have a job with a 401(k), you’ll need to open your own retirement account. The most popular is an Individual Retirement Account (IRA) – but it’s not necessarily the best, especially for younger savers.
“I would highly recommend opening a Roth IRA,” said Jake Hill, CEO of DebtHammer. “Roth IRAs are ideal for people in their twenties, because most people in that age group are in a lower tax bracket than they will be in when they retire. With this type of account, you contribute in after-tax dollars and can make tax-free withdrawals later, so it’s an efficient use of your money.
By putting your money in a Roth IRA, you can save it without locking it up for decades to come. IRAs, like 401(k)s, are funded by pre-tax earnings – penalties for early withdrawals are severe. This is not the case with Roth IRAs, which allow you to access your savings without penalty if you want to buy a house, start a family or start a business between now and retirement, i.e. when your life is unfolding.
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