Best Retirement Strategies for Your 20s

The Best Kept Secret of Retirement Planning

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Who thinks about retirement in their twenties? You should. You’ll reach retirement with enough money to live comfortably if you’re 20-something and you start saving now and you save consistently. You'll have enough money to do the things you never had the time to do during your working years. But first, you need a strategy.

This chart shows five types of investing strategies and asset allocations.

Learn About 401(k) Plans

The 401(k) is based on section 401(k) of the IRS tax code. It allows you to invest money into an account earmarked for retirement without paying taxes on the gains until you reach retirement age. Another type of 401(k) allows you to pay taxes on the money at your current and most likely lower tax rate now instead of later when your salary may be much higher.

A 401(k) plan is only available through an employer. The company will often match your contributions up to a certain limit. Contribute enough to get the full match if your company offers a 401(k) with this type of arrangement. You can start your own 401(k) under your registered company name if you're self-employed.

The advantage of a 401(k) over other retirement savings accounts is that the yearly contribution limit is higher. But there are specific rules you must follow with this money or you'll face steep financial penalties.

Start an IRA

IRAs have many of the same rules as 401(k)s, but their contribution limits are lower. You can only contribute $6,000 annually, or $7,000 if you’re over 50, as of 2021 and 2022, but there are also distinct advantages. You can invest in almost any stock, bond, ETF, or other traditional investment.

IRAs don’t have to go through your employer, either. This gives you a lot more control over how your money is invested. It’s probably best to max out your IRA first and put the remaining money into a 401(k) if your company doesn’t provide a match.

Pay Off Debt

The best and safest investment you can make is in yourself. Invest enough to get your company's 401(k) match, then pay off any high interest rate debt after that. There’s no good financial reason to save extra money for retirement while you're paying thousands of dollars in high-interest credit card debt over several years.

Financial advisors say that if you can pay your student loan debt in less than 10 years, put all your focus there before saving extra for retirement. But that’s not true of all financial situations, so get some advice from a pro before making decisions like this.

Keep Some Cash

You can’t withdraw from your retirement accounts without paying a stiff penalty in most cases. You might be able to borrow from your 401(k), but you have to pay that money back. Keep an emergency fund outside your retirement accounts to cover unplanned expenses. Experts recommend keeping three to six months of living expenses.

Invest Aggressively

You'll experience some scary plunges in the investment markets during your lifetime and before you reach retirement. They'll put your retirement account in freefall, but that’s no reason to invest conservatively in your twenties. Experts recommend being at least 80% invested in stocks at this point in your life because you have 30 or 40 years to recover from those short-term stock market downturns. You'll still make plenty of money.

Make Saving Automatic

It’s easier to stay disciplined when saving happens automatically. Ask HR for paperwork on how to set up automatic withdrawals from your pay that will go straight to your 401(k) or IRA each month. Don’t be stingy. Make it a significant amount, especially while you're not supporting a family. You’re probably not going to go through the hassle of calling HR if you don’t want to contribute this month, so automatic withdrawals can be the best way to keep yourself on target.

Be Proud of Yourself

Aggressive retirement savings in your twenties will mean a super impressive balance long before you retire. Keep an eye on your account and watch it grow and multiply. Be proud of your accomplishment and let it motivate you to save even more.

Nothing beats the effect of compounding gains. The simple passage of time makes you richer and richer. Wealth in later years means security. A lifetime of good choices will allow you to carry out your financial dreams.

Article Sources

  1. United States House of Representatives. “26 USC 401: Qualified Pension, Profit-Sharing, and Stock Bonus Plans.”

  2. Internal Revenue Service. “Roth Account in Your Retirement Plan.”

  3. Internal Revenue Service. “401(k) Plan Overview.”

  4. Internal Revenue Service. “One-Participant 401(k) Plans.”

  5. Internal Revenue Service. “Retirement Topics - 401(k) and Profit-Sharing Plan Contribution Limits.”

  6. Internal Revenue Service. “Retirement Topics - IRA Contribution Limits.”

  7. Internal Revenue Service. "Publication 590-A (2020), Contributions to Individual Retirement Arrangements (IRAs)."

  8. Internal Revenue Service. “Considering a Loan From Your 401(k) Plan?