Saving for Retirement When You Are In Your 20s

Saving for retirement is critical, but many in their 20s and early 30s put it off. 

It’s easy to see why. It’s not cheap to build a new life, buy a home, or start a family. 

Add in inflation, the high cost of housing, and rising interest rates, and it is understandable why many in this age group put off saving for retirement.

According to Vanguard’s How America Saves 2023 report, the median saved for those under 25 is $1,948. For those 25 to 34, the median saved is $11,357.¹

The fact that you are researching tips for saving for retirement is an excellent start.

There are several things you can do now to get yourself in a better financial place by the time you retire. 

#1 Make a Savings Plan Now

Retirement might seem like a long way off, but life has a funny way of catching up to us – and fast. 

It is important to start making a plan for retirement sooner rather than later. This means taking time to consider what you want your retirement to look like.

Consider the following questions:

• At what age do you want to retire? 
• What do you want your retirement to look, feel, and be like? 
• How much money will you need to have the retirement you want? 
• How much do you need to start saving right now to ensure you will reach your goal? 

Answering these questions helps get a plan in place and gives you an idea of how much you need to be saving each month to reach your goal.

#2 Make Saving a Priority

Unfortunately, when you put off saving for retirement until you are older, you make it harder for yourself to save enough for the retirement lifestyle you dream of. 

The time to start saving is today. Even if you can only contribute $50 or $100 per paycheck.

Do it consistently, and, over time, you’ll be surprised at how much you have saved. 

Starting early and making saving for retirement a priority instead of continuously upgrading your lifestyle also help create better money habits that will serve you through life. 

#3 Get the Company Match

Many companies offer a company match for 401(k) contributions.

For example, a company may match up to 100% of up to 6% of your pay. With a $55,000 salary, you could put in 6% or $3,300 for the year, and the company would match this at 100%.

This means if you contribute 6%, or $3,300 a year, your company will contribute 6%, too.

This is free money! 

[Related Read: 4 Ways to Potentially Maximize Your 401(k) Company Match] 

#4 Build Up an Emergency Fund

In addition to contributing to a 401(k), it is important to build up an emergency fund. 

This is something many Americans struggle with. 

According to Bankrate’s Annual Emergency Fund Report, “68% of people are worried they wouldn’t be able to cover their living expenses for just one month if they lost their primary source of income. And when push comes to shove, the majority (57%) of U.S. adults are currently unable to afford a $1,000 emergency expense. When broken down by generation, Gen Zers (85%) and millennials (79%) are more likely to be worried about covering an emergency expense.”²

But emergencies do happen.

If you don’t have an emergency fund and you need money, it will be tempting to withdraw from your retirement savings.

You don’t want to do this – otherwise you may have to pay taxes and penalties on the withdrawals.  

Instead, allocate some of every paycheck to an emergency fund until you have a good amount saved.

#5 Know What You’re Invested In

Too many investors contribute to a 401(k) each paycheck and go about their lives. 

As a result, they don’t know what they are invested in – or even how their account is performing. 

Get engaged with your retirement savings early on. Ask questions of your plan provider, make sure you are in investments that meet your risk tolerance, and read your 401(k) statements. 

Engagement with your 401(k) helps maximize your retirement savings. 

Watch this video on how to read and understand a 401(k) statement.

#6 Avoid Target Date Funds

A target fund is a fund offered by an investment company that’s structured to meet capital needed at some date in the future, such as retirement. 

The asset allocation of a target date fund is based on a predetermined retirement date. TDFs are structured to automatically reallocate as you move through different life stages.

And, as you age toward your target retirement date, the funds shift toward more conservative investments to protect your money.

For many 401(k) investors, this sounds like a win-win. Invest your money, and let it do its thing until retirement.

But here’s the problem…  

Target date funds were created to take away the hassle of having to research mutual funds in your 401(k) and build and construct your own portfolio.

Instead of having to choose a number of investments and create a portfolio, you can just select a fund that will help you reach retirement income goals.  

It’s no wonder target date funds are so popular with 401(k) plan investors…you set it up and forget about it.

Herein lies the problem.

Because target date funds are based on the date of retirement, they fail to take into consideration that not all investors are created equal.

In addition, target date funds may often underperform in good markets and do a poor job of managing downside risk during tough markets.

[Related Read: 3 Ways Target Date Funds May Hurt 401(k) Investors]

#7 Rebalance Regularly

When you just begin saving for retirement, you may not know that you need to rebalance your 401(k).

Many people set up a 401(k) through work, leave it, and forget it.

This is a mistake. And it can be a costly one. 

Rebalancing a 401(k) simply means allocating assets differently. For example, your 50/50 stocks and bonds may need to shift to 72% stocks and 28% bonds to decrease your risk and increase your returns.

Rebalancing doesn’t require you to save more, but it can make a substantial difference to your 401(k).

[Related Read: What Every Investor Needs to Know about Rebalancing a 401(k)]

#8 Ask for Help

If you’d like to take control of your financial future and potentially have more income at retirement, we strongly suggest getting third-party advice. 

If you’re hesitant to reach out for advice because you are just starting out on your retirement savings journey or you think it’s too costly to get help, don’t let that stop you! 

401(k) Maneuver provides professional account management with the goal to help you grow and protect your 401(k).

Our goal is to increase your account performance over time, manage downside risk to minimize losses, and reduce fees that harm your account performance. 

There are no time-consuming in-person meetings and nothing new to learn, and you don’t have to move your account.

Simply connect your account to our secure platform, and we regularly review and rebalance your account for you, when necessary. 

Check here to learn more about how it works.

If you have questions about your 401(k) or if you need help, we’re here for you. Click below to book a complimentary 15-minute 401(k) Strategy Session.

Book a 401(k) Strategy Session

SOURCES

1. https://institutional.vanguard.com/how-america-saves/
2. https://fortune.com/recommends/banking/57-percent-of-americans-cant-afford-a-1000-emergency-expense/