Retirement may seem like an abstract idea far in the future when you’re in your 20’s. You may have just graduated college or bought your first home. And with bills and student loans weighing you down, saving for retirement may be the last thing on your mind!
However, preparing now for retirement is crucial, and the sooner you get started, the better. The biggest advantage to starting young is time. The more time you have, the more you can save for your retirement.
If you put $1,000 into a 401(K) each year from age 20 to age 30, and the account earns 7 percent annually, you will have $168,514 in the account when you retire at age 65. If you don’t start until age 30, but save $1,000 each year for 35 years straight earning 7 percent annually, your account would grow to only $147,913. You could be missing out on nearly $20,000!
Developing the habit of saving for retirement now will make it easier to continue saving throughout your working years. Follow our advice on how you can prepare for retirement in your 20’s:
Budget and Save 10% of Your Income Saving for retirement may seem like a strain on your budget right now, but you can start small and grow. Even setting aside a small portion of your paycheck each month will pay off in big dollars later. We recommend putting 10% of your income into your retirement savings each week. Even small contributions can make a big difference given enough time and the right kind of investments.
Automate Your Savings Set up an automatic deduction from your checking or savings account into your retirement savings account each week or month. By automating the process, you won’t forget to transfer money into your retirement fund. You’ll also be less tempted to spend that money!
Work for a Company that Offers 401(K) Match As an added benefit, many companies now offer 401(K) plans, which is a retirement savings plan sponsored by an employer.
“As you start your career, it’s a great strategy to work for a company that will match your 401(K) contributions. This is basically free money that you don’t want to miss out on!” says Jackie Meekins, AIF®, RPA, Vice President of Retirement Plan Services at Eastern Benefits Group.
Companies may also contribute a percentage based on your contributions to your 401(K). Regardless of their 401(K) plan matching offering, you should invest the maximum amount that your employers matches.
*Note: If you leave the organization, make sure you roll your 401(K) funds over to your new employer.
Contribute to a Roth IRA Account A Roth IRA account, or an Individual Retirement Account, is another type of retirement savings account. The main benefit of a Roth IRA is that you are able to withdraw your savings for any purpose without being charged penalties or income tax. This rule only applies if you are 59 ½ or older and have had the account for at least 5 years. If you’re an excellent saver, you can contribute to your Roth IRA account once you’ve contributed the maximum amount to your 401(K) plan.
Don’t Dip into Your Retirement Savings
Whatever you do, don’t tap into your retirement savings before you’re allowed to. You may lose interest and even tax benefits if you dip into your account before you’re in your 60’s. We recommend setting up a separate savings account that you can use for other big expenses, such as buying a new car, buying a new home, moving to a new city, or starting a family.
Saving for retirement may seem like a strain on your budget right now, but you can start small and grow. By starting young, you also can afford to invest more aggressively because you have years to overcome the inevitable ups and downs of the stock market. We hope these tips are helpful as you begin thinking about your future.
Is your organization interested in setting up 401(K) plans for employees? Let Eastern Benefits Group help you develop your nonqualified benefit plans. We design, install, and monitor retirement plans to meet your unique business needs. Contact us on our website or reach out to Jackie Meekins, AIF®, RPA, our Vice President of Retirement Plan Services via email at [email protected] or by phone at (508) 923-2418.