Retirement may seem far off when you’re in your 20s, but the years quickly pass by, and it’s important to start saving for retirement as soon as possible. Even if you’re just starting out in your career and don’t have a lot of money to put away, you have time on your side. Starting to save early, even if it’s only a small amount each paycheck, you can still reach retirement earlier than you initially thought. Investing in your retirement now can mean a more comfortable, financially secure future when you reach retirement age. There are many benefits of saving for retirement in your 20s, so here a just a few you can take advantage of to help you get a head start.
The power of compound interest.
If you start investing early in your career, you can take advantage of the power of compounding interest. Compound interest is where the interest you earn on an investment is reinvested, earning you additional interest. This accelerates the growth of your savings and investments over time. For example, if you invest $100 and it grows at a rate of 10% annually, you will have $110 after one year, $121 after two years, and $133 after three years. The earlier you start, the less you need to save overall. The Rule of 72 states that the money you have invested will double in roughly 10 years. Starting in your 20s, you could have four decades of doubling if you plan to retire in your 60s. However, if you wait a decade to start saving, you will miss out on one entire round of doubling.
Building solid habits.
When you start saving for retirement in your 20s, you are establishing a great habit that can help you avoid debt and give you financial freedom as you age. Even if you can’t put away huge amounts of money, putting any amount away can help you build other funds, such as an emergency savings fund, and help you work with a budget. Once you start to see your retirement fund grow, it will motivate you to continue saving and can give you the incentive to stay on the right path to financial freedom.
Start in the easiest way possible
Getting started with retirement savings is easy! Many employers offer 401(k) plans, which are an excellent way to begin saving for the future. Many people are automatically enrolled in 401(k) plans, so you may already have one without realizing it. Make sure you contribute enough to get the match, if there is one, as that is essentially free money. If an employer-sponsored retirement account is not something you have access to, consider setting up a Roth individual retirement account. You would need to transfer money into it periodically, but it will grow tax-free until you are ready to retire.
Roth IRAs
If you are eligible and choose to open a Roth IRA, you will be able to take advantage of the post-tax benefits when you withdraw money for your retirement. This means that you won’t owe any more taxes to the IRS when you take out the funds. You can withdraw any money you put in at any time; however, if you withdraw the earnings from the account and you are under the age of 59½ or have had the account for less than five years, you will have to pay taxes on the earnings. You also have more freedom when trading in a Roth IRA compared to an employer-sponsored plan, although you should be careful not to take on too much risk.