How to Start Investing In Your 20's?
You may be fresh out of school or in the early stages of your career. In either case, one of your best money moves right now could be to start saving for retirement.
That's probably not what you wanted to hear. When you're in your 20s, retirement sounds like some strange, theoretical promised-land you might reach some day if you're lucky.
Why worry about it now?
The standard response is true: Because, believe it or not, in some ways this may be the easiest time to start saving for retirement.
The more compelling reason is because, when you do get there, the money you saved in your 20s will have more impact on your lifestyle than money saved at any other time in your career.
Put another way, the money you save now in your 20s is more valuable than any other money you save later on. Check out the table below to see why.
When should I start saving for retirement? Now!
Extra money may be hard to come by in your 20s, but that money can grow into something more meaningful if you invest it now.
Thanks to compounding, the longer your money is invested, the greater opportunity it has to grow. As the table below shows, money put aside at age 25 can be worth much more to you at retirement age than the same amount put aside in the decades to come.
So for example, $5,000 saved at 25 could be the same as saving $8,954 at 35 if you put it in a tax-deferred plan earning 6 percent annual return now and hold it until retirement age at 65.
Why you should start saving for retirement in your 20s
(*Assumes a 6 percent annual return in a tax-deferred plan and retirement at age 65)
$5,000 saved at age 25 is as good as saving…
…at the following ages
Add the power of compounding to the fact that starting early means more years of savings to accumulate, and you can make every precious dollar today even more precious when you reach retirement age.
Saving for retirement in your 20s is easier than you think
Sure, you have an entry-level salary and you're making student loan payments. So it may seem like a bad time to start saving for retirement, but in some ways you'll find it easier now than it might be a decade from now:
- Chances are you have fewer dependents than you will in ten years' time.
- You have fewer entrenched spending habits. Changing those habits to save money only becomes tougher with time.
- You can start by banking your raises. If you put aside part of each raise for retirement from now till the end of your career, you can accumulate a nice nest egg without ever missing money you never counted on before anyway.
- Tax deductions on retirement savings have a yearly limit. If you don't take advantage of them one year, you don't get that opportunity back in future years.
- It's the same deal with employer contributions. Some employers may match part of your retirement-plan contributions, but you would miss out entirely on extra money if you don't contribute.
Truth is, it's never a convenient time to save for retirement, but you have advantages going for you now -- those listed above plus the potential for any dollars you set aside now to have much more impact than dollars you set aside later.
Ready to start investing? Look at this Financial checklist: How to start investing in your 20s
How to start a retirement fund in your 20s
If you are ready to start saving for retirement in your 20s, there are several options available:
- Traditional IRA
You can contribute up to $5,500 a year to a traditional IRA and deduct that amount from your taxes, as long as it does not exceed your taxable income for the year. You won't have to pay taxes on that money or any investment gains until you withdraw money from the IRA after reaching retirement age.
- Roth IRA
Like a traditional IRA, a Roth IRA allows you to contribute up to $5,500 a year as long as you have at least that much in taxable income. With a Roth IRA, though, you don't get to deduct this amount from your taxes -- but then you pay no tax on this money or any investment earnings when you withdraw it. Basically, this means you pay taxes now rather than later, which may be a good move if you have a low income now and are likely to be in a higher tax bracket when you retire.
- 401(k) plan
These are employer-sponsored retirement plans, but you are primarily responsible for how much goes into them. You can deduct up to $18,500 a year in contributions and, as with a traditional IRA, this money plus any investment earnings are not taxed until you start taking money out in retirement.
Some 401(k) plans also have Roth features that allow you to pay taxes now rather than later. Perhaps the greatest benefit is that some employers make matching contributions to their 401(k) plans, which means they'll kick in some portion of what you contribute.
- Health Savings Account (HSA)
If you participate in a high-deductible health plan (or HDHP) at your employer, you are eligible to contribute up to $3,400 a year to a health savings account (or $6,750 if you have family coverage).
This money is tax-deductible, can grow tax-free, and distributions are not taxed as long as they are used for qualified medical expenses. You can use this money to help pay for medical expenses now or let some of it accumulate to help pay future expenses -- a good move considering that healthcare is an especially high portion of spending for older people.
So yes, if you are in your 20s, retirement is still a long way off. But that length of time should be an incentive to start saving now, not a disincentive. The longer the time you have till retirement, the more every dollar saved could count when you get there.
More resources on saving for retirement:
How much do you need to retire? - aka Can I retire on a million dollars?
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