When speaking of retirement, the general rule of thumb is to start early. For Millennials and Gen Zers alike, the idea of saving for anything other than a new apartment or a future that is debt-free may seem absurd, but the benefits of growing a hefty retirement savings over time are unmatched. With the tax-deferred earnings growth from retirement plans like a 401k, the sooner you start saving, the more money you will have accumulated by the time you retire. While saving at a young age may feel overwhelming, there are a few small steps you can take to prepare without breaking the bank. Check out these tips on how to plan for retirement in your 20’s.
Sign Up for Your Work’s Retirement Plan
A 401k is a retirement savings plan offered by many companies as an included benefit. According to the IRS, a 401k “allows an employee to elect to have the employer contribute a portion of the employee’s cash wages to the plan on a pre-tax basis.” After enrolling in your workplace’s 401k plan, your employer will start deducting your desired contribution from your wages, and may even match that amount up to a certain percentage. For example, if you are an employee who makes $2,000 a week and is contributing 5% of your weekly earnings to a 401k plan, you would be putting away $100 a week for retirement. If your employer agrees to match that 5% contribution, your 401k plan would acquire $200 a week. This is why many like to refer to a 401k plan as “free money,” since it is a great way to quickly build a retirement savings account with help from your employer.
Save On Your Own with an IRA Account
There are several situations that might prompt you to open an Individual Retirement Account — a lack of 401k benefits at work, no matching program, or the desire to save additional money on your own. There are two types of IRAs: traditional and Roth. Whereas a traditional IRA is tax-deductible, a Roth IRA is tax-free. Both accounts have a maximum contribution of $6,000 per year if you are under 50 years old or a maximum contribution of $7,000 per year if you are over 50.
Balance Retirement Contributions and Debt
With all of the benefits presented on planning for retirement early, you’re surely itching to make retirement savings your number one financial priority, right? Probably not. As a twenty-something-year-old who is new to managing money on your own, paying off those credit card bills or student debt is enough to worry about. However, if you are suffering from debt, that doesn’t mean you should shy away from saving for retirement now. The key is to find balance between the two contributions. If your work offers a 401k matching plan, invest enough to take them up on that offer. This “free money” will pay off in the long run! Then, focus on paying those bills.
Create An Emergency Fund
An emergency fund is a personal savings account with a high-interest rate that acts as a “safety net” for large unforeseen expenses. This chunk of change can be used for medical bills, unemployment, car or home damages, or basically anything that could be considered a financial emergency. Emergency funds are smart to have no matter what stage of retirement planning you’re at, but what’s the link between the two? With a well-stocked emergency fund, you’ll never have to dip into your retirement savings to cover non-retirement expenses. Don’t set yourself back on all of that financial progress!
While your workplace’s 401k plan is a great place to start when saving for retirement, taking measures to budget and save on your own is essential. Retirement may seem pretty far away, but adopting strong financial habits early is the key to success. To devise a personal budget and action plan that caters to your current financial situation, learn more about the Money Management Services offered by our partner, GreenPath Financial Wellness.