If you’re in your 20s, retirement doesn’t seem high on the priority list. It’s hard to give a lot of attention to a financial milestone that’s 20 to 30 years off when you’re trying to figure out how you’ll pay off your student loans and buy a house in the next 15 years. Nonetheless, these are your most valuable years when it comes to saving for retirement. The money you put into your retirement accounts—and other long-term investments— in your 20s has the most opportunity to grow. In other words, time is really on your side when you start saving for your retirement as a young professional. Once you’re on sure-footing in terms of setting up your first retirement account—either a 401(k) through your work, or an IRA if you’re self-employed—it’s time to start looking into other ways to grow your money. Here are six retirement-related things you should know (or at least start looking into) before you turn 30.
1. Why it’s important to cut back now to benefit later.
In general, delayed gratification will never be as enticing as swiping your card now. Understanding the value of putting money away because it could be worth more later (thanks to those lovely investment returns) is crucial. “Absolutely spend on experiences and creating memories with friends and family,” says Stephen Ng, a New Jersey-based financial advisor. “However, where can you make small changes to save more? Can you pack lunch for work a few more times a week? Can you buy one less cup of coffee a week? Make one less online purchase?”
2. What you can expand to after your first retirement account.
After you are signed up for your employer-provided 401(k)—hopefully with matching—you’ll want to take the next step toward planning for retirement. You may want to diversify or give yourself the option to contribute more to your retirement account than your company may allow. “If you are eligible, contribute to a traditional or Roth IRA,” says Ng. “The total maximum contribution to both types of IRAs is $5,500 per year. With a traditional IRA, you get the tax deduction but pay the tax when you withdraw after age 59 and a half. With a Roth IRA, you do not benefit from the tax deduction upfront; However, the funds will be tax-free at the time of withdrawal. If you think your tax bracket is going to be higher in the future, it is beneficial to contribute to a Roth IRA now.”
3. How you want to diversify your portfolio in the next five years.
Other than retirement, what do you want to save for or invest in? In addition to putting money away for retirement and emergencies, you want to put money into other investments—whether that’s a certain company, an after-tax investment account, or real estate. “Instead of renting, think of saving to purchase real estate,” says Ng. “Millennials have a tremendous window of opportunity where we are in a historically low-interest rate environment. Therefore, if you are thinking of buying a house or condo, the borrowing rate from mortgage companies is much lower than in the past. In addition, housing prices have not fully recovered since the last major correction in 2005. This is a window of opportunity.”
4. The value of putting your money in now.
You also want to know exactly how your money is working for you. What kind of returns can you expect on your various investments? How does that fit into your long-term investment strategy? Ng says, “A 25-year-old that puts a one time investment of $2,000 in their 401(k), with an average return of 8% per year, will have $43,339 at age 65. If the same person waited till age 55 and invested the same amount of $2,000, with an average return of 8%, that investment is $4,318 at age 65. That is the power of compounding.”
5. What your end goal (for retirement) is.
Patrick Renn, a Georgia-based CFP and author of Finding Your Money’s Greater Purpose says, “Each individual needs to start with the end in mind. Establish what will be needed at ‘retirement’ age and work back to today to determine what amount needs to come out of each paycheck to achieve that goal. The benchmarks at age 30, 35, 40, etc., can then be established and compared as progress is made.”