How to Save and Invest for Retirement in Your 20s and 30s

Don Diamonté
8 min readSep 22, 2023

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Retirement may seem far away when you’re just starting your career. But the money you save and invest in your 20s and 30s is the most powerful for growing your retirement fund thanks to decades of tax-advantaged compound growth.

Getting an early start is critical, as waiting even an extra 5–10 years can mean hundreds of thousands less in retirement funds. By making retirement a priority early in your working life, you set yourself up for long-term financial security.

This guide will provide actionable tips to help you maximize retirement contributions, make smart investment choices, and harness the power of time to grow your wealth. Follow this advice, and retirement will be a lot less stressful when the time comes!

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Why Start Saving for Retirement Early?

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Benefit from decades of growth — Money invested in your 20s has 35+ more years to compound compared to money invested in your 50s. Those extra decades of growth are immensely powerful.

Gain advantage of tax savings — Contributing to retirement accounts like 401ks and IRAs provide major tax savings. The earlier you start saving, the more taxes you’ll avoid over time.

Achieve better returns — Investing more aggressively (i.e. stocks over bonds) when younger means your investments have more time to ride out any short-term volatility. This lets you earn higher returns.

Reach retirement goals sooner — The head start from early saving means you can potentially afford to retire earlier or have more security in retirement.

Reduce stress — Getting a jump on retirement savings avoids the stress of playing catch up later. You’ll thank yourself down the road.

Enjoy more financial freedom — Once your retirement savings are on track, you gain flexibility to possibly shift careers, start a business, or take time off without worry.

The simple act of starting to save in your 20s or 30s puts time on your side and sets you up for long-term success.

Retirement Savings Roadmap for Your 20s

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Saving in your 20s is about developing good habits and building momentum. Follow this roadmap:

Open a 401k or IRA — If your employer offers a 401k, contribute enough to get the full company match to start. If no match, open an IRA instead.

Contribute at least 10% of income — Experts recommend saving 10–15% of your salary towards retirement starting in your 20s. Set aside at least 10% to build momentum.

Invest in index funds — Index funds like Vanguard’s provide instant diversification. They offer market returns on autopilot so you can sit back as your money compounds.

Increase savings rate annually — Try to increase your retirement contribution rate by 1–2% each year as you get raises. This painlessly builds up savings over time.

Take advantage of ‘catch up’ years — Some years you may get a windfall like a bonus or tax refund. Put that money towards retirement to accelerate your progress.

Review asset allocation annually — Being 100% stocks may be appropriate in your 20s for growth. Check your risk levels annually as you age.

Consolidate old 401ks — If you change jobs in your 20s, roll over old 401ks into your current one or an IRA to simplify managing investments.

Adopting these habits in your 20s will compound into hundreds of thousands of dollars down the road.

Smart Retirement Investing Decisions in Your 30s

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As your income and savings grow in your 30s, focus on:

Increase contribution to 12–15% — By 30, aim for total retirement contributions of 12–15% of your income, including any employer match.

Fund an emergency savings — Build a cash emergency fund equal to 3–6 months of expenses before increasing retirement contributions further. This prevents needing to tap retirement savings.

Take advantage of employer match — If your employer offers a 401k match, contribute enough to get the full match. This is free money on the table.

Fund Roth IRA — Open and fund a Roth IRA using post-tax dollars to diversify tax exposure in retirement. Having both traditional and Roth savings provides flexibility.

Invest in low-cost index funds — Continue building your portfolio with broad stock and bond index funds to maximize returns long-term.

Rebalance annually or biannually — Revisit your asset allocation at least annually to keep your risk on target as you age and markets shift.

Review fees — As your account balances grow, review investment fees annually and move funds to lower cost providers when useful. Small savings add up.

These smart saving and investing habits in your 30s keep you on track towards your big picture retirement goals.

Exact Retirement Accounts to Open in Your 20s and 30s

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These retirement accounts provide the best options for most investors in their 20s and 30s:

401k

If your employer offers a 401k, this account should be your top priority:

  • Benefits: Pre-tax contributions lower your taxable income. Many employers also match contributions up to 3–6% of pay or more, which is free money.
  • Limits: You can contribute up to $20,500 per year, plus an additional $6,500 catch-up contribution if over age 50.
  • What to know: Take advantage of tax savings and any employer match. Traditional 401k withdrawals in retirement will be taxed as ordinary income.

Roth IRA

Roth IRAs are ideal complements to 401k savings:

  • Benefits: Roth contributions are post-tax, so withdrawals are tax-free in retirement. This diversifies your tax exposure.
  • Limits: You can contribute up to $6,000 per year to a Roth IRA, plus $1,000 catch-up over age 50. Income limits may reduce eligibility.
  • What to know: Choose Roth if you expect taxes to increase in the future. The tax-free growth over decades is valuable.

Health Savings Account (HSA)

HSAs offer a triple tax advantage when used for retirement savings:

  • Benefits: HSAs allow tax-deductible contributions today, tax-free growth, and tax-free withdrawals for medical expenses. It’s the most tax-advantaged account when used properly.
  • Limits: Individuals can contribute up to $3,650 per year, families up to $7,300. Catch up is $1,000 over age 55.
  • What to know: Make sure to invest excess contributions after establishing an emergency fund. HSA funds can be withdrawn anytime for retirement healthcare costs.

Leverage the unique benefits of these accounts to secure your retirement. Contribute early and consistently to maximize growth.

How to Invest Retirement Funds In Your 20s and 30s

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Once you’ve opened the right accounts, you need to invest wisely to earn market-beating returns over decades. Follow these tips:

Start with broad index funds — Build your core portfolio with index funds like Vanguard Total Market and Total International Market to instantly diversify.

Allocate aggressively — In your 20s and 30s, allocate 60–90% of your portfolio to stocks for growth. More conservative bonds can come later.

Add small and mid-cap funds — Sprinkle in small and mid-cap index funds to increase diversification and upside. They complement large-cap holdings well.

Invest in emerging markets — Add emerging market funds like VWO or IEMG for higher potential returns over decades of compounding.

Utilize target date funds — Target date retirement funds offer instant diversified exposure that gets more conservative over time. Set it and forget it.

Reinvest dividends — Reinvest all fund distributions like dividends back into additional shares of the fund to accelerate compounding.

Avoid high fees — Stick to low-cost funds, ideally with expense ratios below 0.2%, to maximize your long-term returns. Avoid fees whenever possible.

Rebalance annually — Rebalance back to target asset allocation percentages each year to control risk and keep allocations aligned to your timeline.

Automate investing early so your money works for you over the long-haul. Consistency and time in the market drive growth.

Common Investing Pitfalls for Retirement to Avoid

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While investing for retirement, be sure to avoid these common missteps:

  • Cashing out a 401k when switching jobs — Roll it over to an IRA or new 401k instead
  • Stopping contributions when markets decline — Stay the course, don’t try to time markets
  • Letting fees eat away at returns — Keep expense ratios below 0.5%, avoid load funds
  • Getting too conservative too early — Keep appropriate stock allocations based on time horizon
  • Failing to rebalance — Rebalance 1–2 times per year to maintain target asset allocation
  • Chasing past returns — Stick to broad index funds rather than pick individual stocks
  • Panic selling in downturns — Ride out short-term volatility, don’t lock in losses
  • Taking on too much risk — Follow wise asset allocation guidelines for your age
  • Not reviewing progress annually — Check retirement trajectories regularly to stay on track

Avoiding these pitfalls will help your hard-earned savings go further as you diligently invest for retirement over decades.

Key Takeaways for Retirement Investing in Your 20s and 30s

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The key lessons for jumpstarting your retirement savings include:

  • Start saving consistently in your 20s, even if only small amounts at first
  • Contribute at least 10–15% of your income towards retirement in your 20s and 30s
  • Take full advantage of employer 401k matches and contribute up to annual limits
  • Fund both pre-tax (401k) and post-tax (Roth IRA) retirement accounts
  • Invest primarily in low-cost, diversified stock index funds for growth
  • Rebalance portfolio allocation annually to balance risk over time
  • Avoid common pitfalls like fees, panic selling, and cashing out early

Maximizing retirement contributions and investing them wisely in your early earning years sets you up for a comfortable retirement ahead. Use time as your most powerful asset.

The money you sock away in your 20s and 30s has decades ahead to grow through the power of compounding. Take advantage of this huge opportunity and get a head start on securing your financial future. Your older self will thank you later

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Don Diamonté

Your go-to source for concise lifestyle and financial insights. I summarize diverse books, distilling wisdom into bite-sized takeaways.