How to Prepare for Retirement in Your 20s
When you’re in your 20s and are brand new to the workforce, planning for retirement may not be on your mind. Instead of thinking about your future golden years, you’re more likely focusing on your new career and any student loan debt you may have to pay off.
However, it’s important to start saving for retirement as early as possible so you can take advantage of compound interest and grow your “nest egg” decades before you need it.
Here are six ways you can prepare for retirement when you’re in your 20s.
- Open an IRA or 401(K) and take advantage of employer contribution matching, if available.
If your employer offers any kind of retirement savings account, such as an IRA or 401(k), sign up for it right away. At minimum, start by contributing what your employer will match, if applicable. Your employer’s contribution is essentially free money that you are leaving on the table if you don’t take the offer. Should your employer not offer a retirement savings plan, contact a trusted financial institution to open up your own IRA. In either case, the more you can afford to contribute early on, the better.
- Don’t be too conservative with your investments.
The younger you, the more aggressively you’ll want to invest with your retirement portfolios. In your 20s, you’ll have plenty of time to ride out any downturns in the market. As you get older, you can adopt a more conservative investing strategy to protect what you have saved.
- Focus on paying down credit card debt.
Paying down debt can seem like an impossible task when you don’t make a lot of money. Ideally, you should try to avoid using credit cards in the first place unless you’re able to pay off the balance in full to avoid accruing interest. If you do, however, find yourself in credit card debt, do the following:
- Speak to your credit card providers about consolidating debt.
- Consider setting a tight budget and getting an additional job on the side until the debt is significantly paid down.
- Don’t just pay the minimum balance due. Instead, pay down the card that has the smallest debt first and work your way up.
- Close each card account as debt is paid off. While this may impact your credit score negatively in the short term, having fewer open debts can increase your score in the long run.
- Build an emergency fund.
Having three to six months worth of expenses set aside in an emergency is ideal, but having even more can better secure your financial future in the event an emergency arises. Depending on your salary and monthly expenses, building an emergency fund can take a few months or a couple years.
When building your emergency funds, contribute as much money as you can each month. You may even consider opening a separate emergency funds savings account and having a portion of your paycheck go directly to that account every payday.
- Increase your retirement savings contributions each year.
A helpful time to increase your contribution is when you get a raise or a bonus. Increasing your monthly contribution based on the percent or dollar amount your salary changed is a sound strategy to regularly increase your contribution. If you are on a tight budget and can only increase the contribution temporarily, doing so for a limited amount of time is better than not increasing it at all.
- Get help from a financial professional.
Once you have decided to save for retirement, you may have questions or run into unexpected problems. A trusted CPA firm can help answer any retirement questions you have as well as ensure you are maximizing your retirement savings potential.
For further assistance with retirement planning at any age, schedule a free consultation with the top-rated accountants at Miller & Company.