6 Ways How Twentysomethings Can Start to Save

By Zina Kumok

August 26, 2016   •   Fact checked by Dumb Little Man

save for retirement

Most retirement advice for young people boils down to this: Start saving, and do it right now.

Unfortunately, the urgency of that message gets lost on far too many youths, too caught up in the prime of their lives to worry about the future.

But with Social Security vanishing and automation primed to replace many jobs, retiring is going to get increasingly difficult for each generation. If millennials and the generations that follow want to live comfortably in their golden years, they need to embrace the importance of an early start.

It’s not just a matter of stashing cash. Follow these simple tips for a rundown on everything you need to know on how to start saving for retirement.

Why Start in Your 20s?

retirement plan

Even though people in their 20s are likely earning less right now, they’re still in the best possible position to start saving for retirement. Creating a solid nest egg is less about how much you can save; it’s when you start to save.

The power of time and compound interest is what gives twenty-somethings the advantage when it comes to saving for retirement. This is when interest is added onto a principal sum and then that new amount builds interest, leading to more significant growth over time.

For example, $50 put away every month for 45 years at age 20 at 7 percent interest compounded annually will yield $172,499.71. Even though you only physically saved $27,000 over those 45 years, you earned $145,500 in compound interest.

See Also: How to Make Saving as Exciting as Spending

If you wait 10 years to start saving for retirement, you’ll have to contribute $103.50 monthly to receive the same sum at age 65. That’s more than double of what you had to save if you started earlier. You can do the math on compound interest using this calculator available from the U.S. Securities and Exchange Commission.

How Twenty-somethings Can Start Saving

retirement planning

Make it automatic. Make your contributions automatic, whether you choose to save for retirement through an employer-based program (like a 401k or 403b) or your own IRA. Set up automatic transfers from your paycheck or checking account into your retirement account to remove any temptation to spend that money.

Contribute enough to get an employer’s match. Many companies that offer workplace-related retirement programs also offer a matching program. For every dollar that you contribute to your retirement, they will put in a certain percentage. For example, if you put in 6 percent of your salary, they may add in 50 percent of that 6 percent for a total of 9 percent of your income going toward retirement.

Put all raises toward retirement. One way to increase how much you save is to put all salary raises into your retirement account. Every time you get a raise or promotion, you should increase how much you put toward retirement and not upgrade your lifestyle. This approach can also be used for windfalls, like tax returns and inheritance.

Aim to save 10-15 percent of your salary. Most experts recommend saving between 10-15 percent of your salary toward retirement in order to have a comparable lifestyle in your golden years. You may be willing to downsize in retirement, but starting in this range will give you a head start in case you hit an unexpected financial speed bump.

Start slow. It’s OK if you can only afford to save $50 a month right now. Remember, the power of compound interest will turn that $50 into a much greater figure later on. Don’t be so discouraged about your inability to put 10 percent of your salary away that you don’t save anything at all—a trap that far too many young people fall into.

Open a Roth IRA or 401k. There are two types of retirement accounts you can open: Roth or traditional. If you open a traditional IRA or 401k, you’ll be able to claim contributions on your taxes, but will have to pay taxes when you take out the money later on. Those opening retirement accounts in their 20s are better off using Roth accounts. You won’t receive any tax benefits now, but you’ll be able to withdraw that money tax-free when you need it.

See Also: Are Men Or Women More Successful At Saving For Retirement?

Delay Social Security. It’s important to delay receiving Social Security benefits until age 70. You’ll receive an extra 8 percent in yearly benefits for every year beyond the full retirement age you wait to get Social Security. That’s free money you get just for waiting.


Zina Kumok

Zina Kumok is a 20-something writer for TraditionalIRA.com and RothIRA.com specializing in personal finance.

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