Your 20s are full of life changes, including graduating from college, starting your first job, getting married, buying a house, and maybe even having kids. Of course not everyone takes the same life path through all of these events, but one thing that everyone in their 20s should be doing is saving for retirement.
Retirement seems so far away when you are in your 20s, and you usually have more immediate financial concerns on your mind related to life’s changes. But that doesn’t mean you should completely forget about saving for retirement.
If you start saving and investing for retirement in your 20s you are more likely to be able to retire comfortably.
According to research done by the U.S. Census Bureau, Saperston Companies, and Bankrate, the average savings of a 50-year-old American is only $42,797, while the total cost of medical care for a 20-year retirement period beginning at age 65 is estimated to be about $218,000. Obviously saving early and often for retirement is important.
Here are four tips to help you get started saving for retirement while you are still in your 20s:
Understand Compound Interest
We already touched on the fact that you are going to need a lot of money to be able to retire comfortably, and understanding how compound interest can work in your favor may help you be more motivated to begin saving for retirement early and often.
For example, if you save $5,000 each year tax-deferred and earn an average 8% interest, that money will grow to over $1.3 million over 40 years. Plus you’ll have only contributed $200,000 of that. The rest comes from compounding interest over time.
Pay Yourself First
One of the most basic tips to get started with savings of any kind, including saving for retirement, is to pay yourself first instead of waiting to the end of each month and saving what is leftover. Nine times out of 10 you can think of more exciting ways to use that extra money now instead of putting into your savings or retirement investment accounts.
Make your savings a regular monthly bill that you have to pay, or better yet have a portion of your paycheck withheld for retirement before you receive your money. To help with other savings goals you can set up a recurring monthly transfer from your checking account to your savings account so you don’t have to remember to pay the “bill” you have for yourself.
Get Your Employer Match
If you are lucky enough to work for a company that offers an employer match for retirement contributions, make sure you are taking full advantage of it by contributing at least enough to get their full match each pay period. This is free money and it’s like getting an automatic 100% rate of return on your investment.
Increase Contributions When Saving for Retirement
One of the smartest tips I ever heard was that you should increase your retirement contribution percentage by at least 1% each year or whenever you get a raise. By increasing your retirement contributions before you get used to the extra money from your raise, you won’t ever find yourself missing that money and you won’t get the chance to use it for lifestyle inflation.
It’s not hard to get started saving for retirement in your 20s with these simple tips and the benefits of doing so are enormous.
When did you get started saving for retirement?