If you’re a twenty-something new to the workforce, retirement may not be the first thing on your mind. Maybe you just graduated from college, or recently landed your first “grown-up” job. It can be difficult to plan so far into your future when it feels like life in the “real world” is only just getting started.
Further, it can also be difficult to save when there are so many bills to pay, especially when your paycheck is slimmer than your accumulated student debt. Add on top of loan repayments expenses like credit card and car payments, along with rent, groceries, and utility bills, and it can sometimes feel like the check you get at the end of each pay period is yours for no time at all. Saving for anything, let alone saving for retirement, might seem like a mammoth, impossible task.
The unfortunate reality, however, is that if you can manage to begin saving for retirement while you’re still in your early to mid 20s, you’ll find that that money goes much further toward getting you the retirement you want than it would if you had put off the (admittedly painful) process of saving until later in life when your career is more stable and your paycheck is a little more plump.
Even if you don’t make a lot of money, if you’re committed to and smart about saving, you can actually build yourself a sizable nest egg, even in your youth. Ken Waltzer, a certified financial planner and president of Kenfield Capital Strategies told NBC News it’s not always about how much money you make. “I look at my clients, the ones who have the most money today in retirement, it’s not the people who earned the most. It’s the people who saved the most.”
Twenty-somethings may not be at the height of their earning potential, but they do have time on their side. Even if you can’t contribute much, it’s important to get started now. Read on to discover 3 important first steps to getting your retirement savings underway.
1. Establish goals and plan your financial future
Saving money arbitrarily is certainly better than not saving at all, but having concrete, written financial goals is even better and is an important first step toward accomplishing the kind of financial security and peace of mind everyone hopes to have in retirement. This might seem overly obvious to some readers, but taking the time to set goals for yourself regarding the amount of money you’d like to have saved for retirement in 1, 5, or 10 years can be just the incentive you need to get going.
By setting timelines for yourself and establishing objectives, you can visualize your retirement and financial future. It becomes more concrete, and therefore easier to understand and easier to work toward than if you simply have an amorphous, ambiguous idea that you’re going to start “saving for retirement.” You’ll want to consult a retirement calculator, such as this one, by Kiplinger, to determine how much money you should be saving for retirement each month.
If there’s one saying in the personal finance community that is a bit of a broken record, it’s “pay yourself first.” But that wisdom applies to retirement savings as well. Gil Armour, a certified financial advisor with SagePoint Financial advocates setting up a system in which you save money before you can spend it; in other words, make your contributions to your retirement accounts as soon as you get your paycheck. Better yet, set up an automated direct deposit system so that you never even see the money going into your retirement savings. If you “pay yourself first” you never have to worry about being tempted to spend the money you should be saving. Automated direct deposit is also a great way to ensure that you meet your savings goals year after year. Just be sure that you take the time to review those goals periodically, such as once a year, or whenever you are promoted.
2. Get all you can out of your employer’s 401(k) plan
401(k) plans are retirement plans sponsored by your employer, and for many Americans the funds in these accounts form the basis, if not the entirety, of their retirement savings. Americans rely heavily on 401(k)s for retirement, and for good reason; one of the profound benefits of a 401(k) is that you are able to invest a portion of your paycheck before taxes. They’re also one of the simplest and easiest ways to save for retirement and can save you money in taxes, so if you don’t already participate sign up now.
You may have heard that you need to “max out” your 401(k) contributions each year in order to keep on track while saving for retirement. This is certainly ideal, but for many people, especially young people new to the job market, this isn’t always possible. After all, the maximum contribution to a 401(k) for 2014 was $17,500, a pretty steep sum for a twenty-something straight out of school or a few years into their first job.
If you can’t contribute the maximum amount, don’t worry. What is important is that you contribute as much as you can. If nothing else, find out if your employer offers benefits “matching.” If your employer offers this, it means they will match a certain percentage of the income you contribute to your 401(k). If your employer offers this be sure that you are, at the very least, meeting the minimum contribution necessary to take advantage of employer matching.
Further, many companies take the employer matching benefit into account when they hire you, and actually subtract the percentage of money they say they’ll match from your annual salary. In other words, if your employer says they will match your contributions to your 401(k) up to 3%, then they actually deduct 3 percent from your annual salary to account for that. Not taking advantage of employer matching is, in essence, throwing away free money, or taking a voluntary pay cut.
3. Open an IRA or Roth IRA, and make regular contributions
If your employer doesn’t provide you with a 401(k) then you’ll definitely want to open an IRA. In fact, even if your employer does offer a 401(k), an IRA is a great way to contribute a little extra and give yourself the best head start you possibly can. There are two major categories of IRA, the Roth IRA and the traditional IRA, though the maximum contribution is the same for both: $5,500 if you’re under 50 years old for the tax years 2014 and 2015.
One of the benefits of a traditional IRA is that you’ll likely be eligible for a tax break; generally you can claim some or all of your contribution as a deduction. But while growth within a traditional IRA is tax-deferred, you do have to pay taxes when you begin withdrawing funds from the account when you retire. You are also required to take an RMD (required minimum distribution) from a traditional IRA beginning at age 70 ½.
For twenty-somethings, Roth IRAs are often considered the better bargain. Contributions are made after-tax, but like the traditional IRA, growth is tax-deferred, and further, your earnings will remain tax free when you withdraw them during retirement. This tax-deferral aspect is especially valuable for young people. “The longer your time horizon is, the more valuable the tax deferral is,” notes Waltzer. Further, because you can’t touch the savings in this type of account without a penalty, a Roth IRA is a great choice for the spendthrifts in each of us that has a hard time committing to saving.
Like your 401(k), you’ll want to set up automatic transfers to your Roth or traditional IRA after you open them to ensure that you’re meeting your savings goals.