Though retirement may seem far off, it’s never too early to start saving for it. By setting aside a small amount each month, you can build up an impressive nest egg that will enable you to reach your long-term financial objectives.
Start by enrolling in a 401(k) plan. Many employers provide matching contributions up to a certain amount.
1. Get a Job with a 401(k) Plan
Gaining employment with a 401(k) plan is an excellent way to begin saving for retirement in your 20s. These workplace savings plans are tax-favored and automatically deducted from your paycheck.
Saving as much money as possible early in life and then gradually increasing your contributions over time can help your money grow exponentially, giving you a secure financial foundation for later in life.
Many companies provide 401(k) matching programs. These match your contributions based on earnings, either dollar for dollar or as a percentage.
Contribute the maximum amount that your employer matches each year if possible, to maximize your retirement funds and ensure you reach your retirement objectives.
2. Maximize Your Employer’s Match
Maximizing your employer’s 401(k) match is the best way to save for retirement. Your employer will likely match up to a certain percentage, such as 2-5 percent of salary, in contributions.
Savings are immediately rewarded and tax savings are realized. Nonetheless, it’s essential to remember that contribution limits are set by the government; therefore, you may not be able to maximize your 401(k) plan if there is a match from your employer.
If you don’t have access to a match, contributing at least 15% of your pretax income into an account is an excellent starting point. This will provide enough money for retirement at 67 – when most people receive their Social Security benefits – regardless of age.
3. Build an Emergency Fund
Maintaining an emergency fund can help you prepare for the unexpected and prevent additional debt in case of illness or job loss.
Financial experts typically recommend having three to six months’ worth of expenses saved in your emergency savings account. Ideally, this money should be in an account that offers some interest but still provides liquidity when needed most.
If you don’t have enough cash in your savings account to cover unexpected expenses, try selling some unwanted items or rearranging your budget to reduce spending.
Another way to build up an emergency fund is by taking on part-time or side jobs. This could include tutoring, driving or posting ads online to sell your items.
It’s essential to find ways to save money and maximize your time and energy. While this may require some sacrifice and hard work, it can be done.
4. Take Advantage of Tax-Advantaged Retirement Vehicles
The more tax-favored retirement vehicles you can access, the greater your annual contributions. Examples include workplace plans like 401(k)s and Roth 401(k), individual retirement accounts (IRAs), as well as health savings accounts (HSAs).
Depending on your employer, tax benefits can make a substantial impact on how much money you save annually. Not only do these accounts provide tax-deferred growth, but they may also offer potential tax-free withdrawals during retirement.
When planning for retirement in your 20s, consider contributing to both pre-tax and post-tax accounts. Doing this can help diversify your investments and create a tax-deferred investing strategy that’s advantageous for most people.