Saving for Retirement in Your 20s
Originally published on the OnePay Blog.
For most people in their 20’s, saving for retirement is not a top priority. But new studies show that Millennials will need an estimated $2 million to retire after adjusting for inflation. This represents a significant increase from previous generations. Read on to learn more about why you should start saving and what your options are.
Start Saving Now
If you’re not already saving for retirement, there is no better time to start than today.
A lot of people tell themselves they’ll wait until they make more money, pay off student loans, or hit their 30’s. But investing in your 20’s is a smart move, even though retirement seems like lightyears away. The reality is the pace of life is faster than we think, and putting it off is not the answer.
Even if you’re only putting away a small amount, it’s still better than nothing. Additionally, it helps you create good saving habits for the future. Your monthly investment may be small today, but you can always increase the amount you put away as your income grows over time. Starting sooner also allows you to take advantage of compound interest for a longer period of time.
A little can go a long way, but only if you get started early.
401(k) Accounts
401(k) plans through your employer are one of the easiest ways to plan for your future. A 401(k) is a savings program that automatically puts away a percentage of your income before taxes are taken out. One of the best features of a 401(k) program is employer matching, meaning that if you put in 1,000, so will they. Typically, employers will match up to 3%, but you can always opt to increase your own percentage anyways. Either way, 3% is a great place to start. Since the money will be pulled out of your paycheck before it gets to you, it won’t feel like you’re losing money, and the automated process means you’ll never forget.
Most employers will have 401(k) accounts managed by other companies, like Fidelity Investments. To check in with how your investment is doing, you can create an account directly through the Fidelity website and get updates on how your money growing.
For people who don’t have 401(k) programs through their employer, that doesn’t mean you can’t save for the future.
Traditional and Roth IRA Accounts
An IRA, which stands for Individual Retirement Account, is another great option for saving for retirement. Even if you have a 401(k) account, you can still do both, increasing your savings and your investment opportunities.
For a Traditional IRA Account, you are putting money into the account that you’ll be able to deduct on your tax return. The money in the account will be able to grow tax-deferred, meaning that it won’t be taxed until you withdraw it. When it is taxed, it will be treated as if it’s your current income. As long as you don’t withdraw until you are at least 59, there is no fee or penalty for withdrawing.
A Roth IRA Account is what most financial experts recommend for people in their 20’s. While the money is not deductible on your tax return, because you’ll be investing money that you’ve already paid taxes on. However, the benefit of the Roth IRA is the ability for tax-free withdrawals. As long as you make less than $116,000 a year for single people, or $183,000 if you’re married, you qualify. This means that most people in their 20’s qualify.
You can open a Roth IRA account through a financial institution. A few companies who offer Roth IRA accounts are Fidelity, E*Trade, and Merrill Edge, giving you plenty of options to get your retirement plan started. You can create an account fairly easily online, without ever having to enter a bank. These websites also have hotlines you can call or online chat services if you need help, making the process a little less stressful.
Honest Dollar
Austin based Honest Dollar offers an innovative approach to retirement plans. Honest Dollar is perfect for startups and small businesses, or for independent contractors and the self-employed.
Over 70 million people in the US don’t have a retirement plan, even though they have a job, and Honest Dollar was founded to change that. Their retirement savings program is cheaper and easier to use for both the employer and employee.
In about 2 minutes online, you can set up a Traditional or Roth IRA that will take a set amount out of your paycheck, and Honest Dollar handles all the paperwork for you. With a 401(k), employees can only contribute up to $5,500 a year, but an IRA through Honest Dollar increases that limit to $12,500. Both the employer and employee are charged less for setting up the account and for maintenance fees, so everybody wins. Alternatively, they offer SEP IRA plans, or Simplified Employee Pension IRA, allowing employers to match contributions at a set amount.
The Takeaway
Regardless of what you choose, saving in your 20’s is a smart move to improve your financial health. Don’t put saving for the future on the back-burner — start saving now to make the most of your future.
OnePay is a free bill paying service that consolidates your monthly bills, and helps you pay less. By analyzing your trends and data, we find you ways to save on monthly bills by up to $1000 a year. For more on saving money, personal finance, fintech trends, and more, follow us on Twitter: @JustOnePay.
