3 Sneaky Ways to Maximize Retirement Savings before You’re 30
Much like investing in the stock market, investing in your own retirement requires a strategy that combines patience, foresight and time. While 20-somethings may not have the first two down pat, by kicking off their retirement savings early, they’ll be able to fully leverage the advantage of time. In this case, time is literally money.
Compound interest is the best kind of interest
Retirement savings work in such a way that the longer you’re saving, the quicker they accrue interest. With the advantage of an early start, and with firsthand memory of the damage failing to save can cause after witnessing the 2008 recession, it’s no wonder millennials start saving for retirement at 23–4 years earlier, on average, than Gen-X’ers and 8 (!) years earlier than baby boomers did.
However, is this head-start them much good? On one hand, millennials carry heavier financial burdens such as higher rent and student loans coupled with lower wage; and on the other, they have to make do with significantly less financial knowledge. As a result, a staggering two thirds of millennials contribute less than 5% of their salary to retirement plans. Unfortunately, that’s not going to cut it.
Turn this savings ship around
Deferring funds to a retirement savings account can seem useless, especially if retirement is decades away and the current earned wage seems to barely cover expenses. However, it’s precisely for these reasons it’s imminent to accommodate for roughly 10% savings early, so that this chunk of the budget is accounted for and not used for non-essentials down the road. What’s more, while their wages do typically improve, people aged 30 and 40 have a whole new set of financial obligations to worry about.
If you’re committed to maximizing your savings for retirement before your 30s, here’s how you can start:
Research your company’s 401(k) plan — and take full advantage of it
Not every company offers a 401(k) matching plan, but most do. If you’re fortunate enough to work at one that does, and you’re not taking advantage of it, you’re essentially refusing free money. Considering the compound interest, this benefit is so significant in the long run, that it can often outweigh other employment conditions such as salary. And don’t be afraid to dive in — take the maximum matching offered by your employer.
If you’re in the rare position of still having money leftover to save, we encourage you to open a Roth IRA; you’ll thank us when you’re in your 60s and every withdrawal from your Roth is 100% tax-free.
Automate yourself into discipline
Once your savings plans have been set up, it’s time you set yourself up for success by ensuring that all transfers are made regularly and automatically. By not allowing the funds into your checking account, you won’t miss them when they’re transferred to savings, thereby saving you from FOMO. You’ll get used to managing with the money in your checking account, and quickly forget about the hefty nest egg you’re cultivating simultaneously. That’ll be a nice surprise when it’s time to retire!
Save whatever you can, whenever you can
Change users often cite their favorite message as the one reminding them of a small monthly recurring payment, demonstrating how much it adds up to in one year. Saving works on a similar basis, with no effort too small to be worthwhile. Skipping Chipotle here and there in favor of eating-in is a small sacrifice, and putting that money towards retirement can result in a yearly boost of more than $500. With compound interest over 4 decades, you won’t miss that burrito one bit. Gradually, you’ll hopefully also learn to avoid fast fashion and other money guzzlers, and poof: There’s that money you didn’t think you had enough of.
Pro tip: Focus on reining in your wasteful habits, and let Auto-Saving do the rest.
Though you may feel young and vibrant now, it’s never too early to think about retirement. Retirement is an exciting time, but also an expensive time: If not for medical reasons, you’ll still have living expenses to cover without a regular income, and maybe a kid or two to put through college. If you manage to get a leg up on these recommendations any time during your 20s, you’ll already be ahead of the game. Invest your money where it’ll have the greatest impact: Yourself!
Originally published at gochange.co on June 12, 2017.
