Why You Can’t Snooze on Retirement Planning in Your 20s

Andrew Zoeller

Planning for retirement. Could anything be less exciting?

It’s far away. Money’s tight. You’re busy. You have a million other worries.

But do you know what is exciting?

Lounging on the beach. Traveling the world. Having financial freedom. Relaxing in your dream home.

Ready for the unfortunate news?

To make that fun future a reality, thinking about retirement is a necessity — as early as possible.

Even though you’re young and your whole future is ahead of you, it’s essential to start investing in your retirement sooner rather than later. Much sooner.

Here’s everything you need to know about retirement planning in your 20s.

First, why is it so hard for 20-somethings to retirement plan?

It all comes down to expendable cash.

Well-paying jobs are hard to find, and people in their 20s are just beginning their careers. Many can only find part-time jobs with no retirement benefits or incentives. Plus, housing costs are high, starting a family is expensive, and there are plenty of other bills to pay. Oh, and let’s not forget the ridiculous amounts of student loan debt.

The average 20-something makes less than $50,000 per year, has a total of $1,900 in average monthly expenses, and has an average student loan debt of $29,650.

Only 23% of 20-somethings contribute over 15% of their income to savings — with 14% contributing nothing at all — and just 46% are putting money away for retirement.

Sadly, planning for retirement often takes a back seat to other life needs for people in their 20s — especially if they don’t have worthwhile retirement benefits from their employers.

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Why is retirement planning important?

Again: money. In an ideal situation, retirement contributions are put away and never touched — out of sight and out of mind. These savings aren’t for short-term needs. They grow over the long haul to give future you total financial stability.

For example, let’s say you make $50,000 per year and put away a modest 4% of your income per paycheck into a retirement fund — beginning at age 25. 

If you do this until you’re 65, without ever increasing your contribution percentage, you’ll have about $400,000 saved to help you live a cushier life.

But let’s say you do everything the same, but don’t start until you’re 30.

You’ll only have about $280,000 saved — a whopping $120,000 less to enjoy during senior-hood.

Needless to say, the name of the game is putting away money as soon as you can for maximum reward.

How can you invest in your retirement?

Below are the most common retirement accounts used to build up cash over the long-term.

401(k): These are workplace accounts, offered by employers as a benefit, which allow you to contribute a percentage of your pre-tax paycheck directly to tax-deferred investments. Investments grow tax-deferred until they’re withdrawn, and some employers offer contribution matching programs up to a certain percentage. Solo 401(k) accounts are also available to those who are self-employed with no employees.

403(b): Employees of non-profits or other tax-exempt organizations are usually provided with the option to contribute to a 403(b) plan, which is very similar to a 401(k).

457(b): Another option that shares features of a 401(k), 457(b) accounts are offered through state and local governments. These accounts allow eligible employees to withdraw funds before the age of 59.5 without incurring a penalty.

Traditional IRA: IRAs, or individual retirement accounts, are tax-favored investment accounts that can be opened outside of your employer’s available plans. Putting money into an IRA can be a smart option if your job doesn’t offer a retirement plan or if you’ve maxed out your 401(k) contributions for the year. With an IRA, your investment gains aren’t taxed — which allows them to grow quickly.

Roth IRA: In comparison to traditional IRAs, Roth IRAs are made up of after-tax contributions. However, after your funds are added to a Roth, any money made within it is never taxed again. You can also withdraw money from a Roth before retirement age without penalty, as long as at least five years have passed since your first contribution.

Roth 401(k): This account combines aspects of a Roth IRA and 401(k). It’s an employer-sponsored account, but contributions are made with after-tax funds instead of pre-tax dollars. Those contributions are never taxed again after being in the account for a minimum of 5 years.

Simple IRA: A Savings Incentive Match for Employees IRA can be offered by small businesses with under 100 employees. These retirement plans work similarly to a 401(k), but withdrawing early can have a hefty penalty and borrowing from the account isn’t allowed. However, employers are required to make contributions to the account in addition to your own.

SEP IRA: A Simplified Employee Pension IRA is a retirement plan option for small business owners and those who are self-employed. Contributions can be fully deducted from your taxable income. However, contribution rules tend to make this plan best for companies with few or no employees.

What steps do you need to take for retirement planning?

No retirement planning situation is the same, and there’s no one-size-fits-all approach to saving for retirement. But here are some general steps to get your retirement fund up and running from scratch.

  1. Research each type of available retirement account for your situation.
  2. Open the retirement account you’re eligible for that best matches your needs — usually a 401(k) if your job offers it, or an IRA if it doesn’t.
  3. Determine your currently monthly budget and figure out how much extra cash you have that can be comfortably put toward retirement. Make sure you’re not spreading yourself too thin.
  4. Contribute a percentage of each paycheck to your new account. Even 2% to 4% can make a big difference in the long run, especially if you start early.
  5. Check with your employer to see if they offer any retirement benefits. Take advantage of any incentives or match programs — if you don’t, you are leaving free money on the table. If your employer will match up to 4%, contributing a minimum of that amount is in your best interest.
  6. Monitor your retirement fund and make percentage increases when your monthly budget allows it.
  7. When deciding between high risk or conservative investments for your retirement account, consider higher-risk options while you’re young and you have more time to recover from market downturns. The closer you get to retirement, the more conservative your investments should become — you don’t want a market correction to wipe out 10% of your retirement savings just before you start using it.

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Is it better to invest in retirement or pay off student loans?

Ah, the age-old question.

Student loan debt is often a major burden on the budgets of recent college graduates and people in their 20s. So of course, many young people want to get rid of it as quickly as possible to free themselves up financially.

But saving for retirement is typically one of the most important long-term items to include in your monthly expenses. Your future self will thank you for taking it into account.

To successfully plan for retirement, it’s essential to save something each paycheck as early as you can — even if it’s a small amount. If your employer offers a match program, you should ideally at least make the maximum contribution your job will match.

Outside of that, it really boils down to your income and monthly expenses. Take the time to figure out your budget and how much extra money you have each month. From there, put what you’re comfortable with toward retirement. If you’re not sure how much to save, or if you’re unsure about which retirement account is right for you, we recommend consulting with a tax advisor or certified financial planner.

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Education Loan Finance is a nationwide student loan debt consolidation and refinance program offered by Tennessee based SouthEast Bank. ELFI is designed to assist borrowers through consolidating and refinancing loans into one single loan that effectively lowers your cost of education debt and/or makes repayment very simple. Subject to credit approval. See Terms & Conditions. Interest rates current as of 01/01/2023. The interest rate and monthly payment for a variable rate loan may increase after closing, but will never exceed 9.95% APR. Interest rates may be different from the rates shown above and will be based on the term of your loan, your financial history, and other factors, including your cosigner’s (if any) financial history. For example, a 10-year loan with a fixed rate of 6% would have 120 payments of $11.00 per $1,000 borrowed. Rates are subject to change.

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Fixed rates range from 4.49% APR to 8.99% APR with a 0.25% autopay discount. Variable rates from 5.09% APR to 8.99% APR with a 0.25% autopay discount. Unless required to be lower to comply with applicable law, Variable Interest rates on 5-, 7-, and 10-year terms are capped at 8.95% APR; 15- and 20-year terms are capped at 9.95% APR. Your actual rate will be within the range of rates listed above and will depend on the term you select, evaluation of your creditworthiness, income, presence of a co-signer and a variety of other factors. Lowest rates reserved for the most creditworthy borrowers. For the SoFi variable-rate product, the variable interest rate for a given month is derived by adding a margin to the 30-day average SOFR index, published two business days preceding such calendar month, rounded up to the nearest one hundredth of one percent (0.01% or 0.0001). APRs for variable-rate loans may increase after origination if the SOFR index increases. The SoFi 0.25% autopay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. This benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account. The benefit lowers your interest rate but does not change the amount of your monthly payment. This benefit is suspended during periods of deferment and forbearance. Autopay is not required to receive a loan from SoFi.

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Fixed Rate Loan Terms: 5 years/60 monthly payments, 7 years/84 monthly payments, 10 years/120 monthly payments, 15 years/180 monthly payments, or 20 years/240 monthly payments. Annual Percentage Rate [APR] is the cost of credit calculating the interest rate, loan amount, repayment term and the timing of payments. This rate is expressed as an APR. Fixed APRs range from 6.94% to 11.58% APR [low to high range with 0.25% auto-debit rate reduction]. Rates are subject to change without notice. Fixed rates will not change during the term. Since there are no fees associated with this loan offer, the APR is the same percentage as the actual interest rate of the loan including a 0.25% auto-debit rate reduction. These rates are subject to additional terms and conditions, and rates are subject to change at any time without notice. All estimates are based on information provided by you and are for informational purposes only, accuracy is not guaranteed and may not reflect actual rates or savings and do not constitute an offer of credit. Your actual rate, payment and savings may be different based on credit history, actual interest rate, loan amount, and term, including your cosigner [if applicable]. If applying with a cosigner, we use the higher credit score between the borrower and the cosigner for approval purposes. All loans are subject to credit approval.

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