Think You Can't Retire? Think Again

How to make sure you can retire on time

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Generally speaking, many Americans lack confidence around retiring comfortably due to financial instability. Just 37% of employees nationwide believe they’ll be able to retire when they want, according to a 2019 survey from PwC. The number one concern? Running out of money. That confidence is actually lower for millennials, the youngest generation accounted for in the survey. Thirty-five percent of millennials, compared to 49% of baby boomers, were confident about retirement.

While the data is disheartening, the fear of never being able to retire can be addressed with some pretty basic planning. That’s especially true if you’re in your 20s. That’s because time is on your side, and that time can be leveraged to build a significant retirement nest egg from even a small amount of savings. Here’s what you need to know about preparing for retirement in your 20s.

Retirement Savings in the U.S.

To understand the low confidence around retirement, it’s important to take a look at how people in the U.S. are saving for retirement.

In a 2020 retirement confidence survey, 25% of 25- to 34-year-olds claimed to have less than $1,000 saved toward retirement. That’s a higher percentage than any other age group surveyed, but 16% of people between 45 and 54 responded that they have less than $1,000 saved, too. 

While you need to save, you don’t have to save it all at once. Set some reasonable goals to hit by different ages. For example, aim to save one year’s worth of your salary by the time you reach 30.

Social Security

In addition to people not having enough saved for retirement, there are also concerns about the future of Social Security. In the U.S. Social Security is a significant source of retirement income for most people. The exact benefit amount varies from person to person depending on things like age, earnings, and filing choice. However, for someone with a lower income, earning 45% of the average salary who plans to retire at age 65, Social Security generally replaces about half of their earnings. Benefits for a higher earner—someone who earns 160% of the average wage—replace about one-quarter of their earnings.

While Social Security does have its funding problems, the consequences are often misunderstood. The trust fund is on track to run dry by 2034, but that doesn’t mean Social Security benefits will completely stop. Social Security taxes will still be enough to fund about 78% of benefits after that, according to the Social Security Administration.

The state of Social Security benefits could change should Congress implement a policy to fix the shortfall. The takeaway here, though, is that even if no changes are made, Social Security won’t disappear completely.

Starting Early With Your Retirement Planning

If you’re in your 20s and think you won’t be able to retire, consider how much starting early can help. Let’s compare what your retirement savings could be. For this example, we’ll start with different ages and use some basic assumptions.

Let's assume that you save $3,000 per year ($250 per month) and earn an annual return of 5% on that money in your retirement account. 

First, let’s look at how much you could accumulate by the time you are 70 if you started saving when you were 40. By saving just $3,000 per year, earning 5% each year, you’d accumulate $203.848.30 by the time you turned 70. 

What if you started saving sooner? In the same scenario, starting just 10 years earlier increases your total retirement savings to $370,638.19. Starting when you’re 20 increases your savings at age 70 to $642,321.44—over three times the amount you’d have if you waited until 40 to save and invest for retirement. This growth is all thanks to compounding.

You can also easily calculate different scenarios, based on age, monthly savings goals, and investment returns, by using a simple, online savings calculator. For example, you can visit and enter any combination of age, savings rate, and returns to see what impact you'll get from a different assumption

While most people begin full-time employment in their 20s—generally providing them the chance to start saving for retirement at that age—the majority don’t actually begin investing in workplace retirement plans until 37.

If you used the 4% rule as a guide, then you’d be able to withdraw $25,121.76 in each year of retirement. And that’s just assuming you save $3,000 per year for 50 years. If you saved $5,000 each year starting at age 20, then your total savings at 70 could be $1,071,384.34 and you’d be able to withdraw $41,869.93 each year. 

The amounts stated in the example above do not include Social Security benefits or other sources of income. That means your savings can potentially provide a large portion of retirement income if you start saving and investing at a young age

Smart Strategies for Saving for Retirement in Your 20s

Starting early is a powerful way to improve your chances for a good retirement. In addition to starting to save for retirement in your 20s, there are other strategies you can take to ensure a better retirement experience in the future. 

Open a Roth IRA

Roth IRAs are individual retirement accounts that allow you to save and invest money that can be withdrawn tax-free in retirement. Withdrawals from traditional IRAs and other retirement accounts are taxed as income, and the difference can be substantial.

Anthony Watson of Thrive Retirement Specialists in Dearborn, Michigan, told The Balance that funding a Roth IRA is best early in your career when you are earning less, and being taxed less.

“Take advantage of the ability to contribute to this valuable account type before it potentially gets phased out at higher earnings later,” Watson said.

Combined with other retirement accounts like a 401(k) or IRA that are taxed at personal income rates when the money is withdrawn in retirement, you could craft a superior, tax-efficient withdrawal strategy.

Control Your Expenses 

In most cases, your salary will likely be lower in your 20s compared to later in your working life. Finding money to save for retirement often boils down to your ability to keep expenses low rather than securing a high-paying job. Chris Diodato, founder and lead financial planner of WELLth Financial Planning in Palm Beach Gardens, Florida, told The Balance that these tips can help keep expenses low as a young adult:

  • Don’t sink money into expensive cars, no matter how much you want to.
  • Keep your utility bills in check by continuously looking for opportunities to decrease monthly expenses
  • Pay your credit cards off regularly to avoid interest charges.

Take Advantage of Automatic Increases in Your 401(k)

When you are young and just starting out, it may be difficult to save a substantial amount. As your income grows, though, try to increase your savings at the same time. When it makes sense, get as close to the maximum annual contribution in your 401(k) as you can. For 2021, that’s $19,500, increasing to $20,500 in 2022.

Some 401(k) plans can also be automated so that your contribution increases by 1% or 2% each year. By signing up for automatic annual increases, even if you start by saving a small percentage of your income, you could be up to 10% or more by the time you’re 30.

The Bottom Line

Retirement seems like a long way off when you are in your 20s. However, time is a valuable tool that you can use to eventually reach a comfortable lifestyle in retirement. By saving and investing early to take advantage of compound returns, being mindful of taxes, controlling your expenses, and increasing your savings rate over time, you can put retirement within reach.

Article Sources

  1. PwC. "8th Annual Employee Financial Wellness Survey," Pages 22-23. Accessed Dec. 6, 2021. 

  2. Employee Benefit Research Institute. "Retirement Confidence Survey," Page 1. Accessed Dec. 6, 2021. 

  3. Center on Budget and Policy Priorities. "Policy Basics: Top Ten Facts about Social Security." Accessed Dec. 6, 2021.

  4. Social Security Administration. "Status of the Social Security and Medicare Programs." Accessed Dec. 6, 2021.

  5. Edelman Financial Engines T.R.U.S.T. Fund for America. "A Proposal to Provide Guaranteed Lifetime Incometo Every Future Generation," Page 1. Accessed Dec. 6, 2021. 

  6. Internal Revenue Service. "Traditional and Roth IRAs." Accessed Dec. 6, 2021.

  7. Internal Revenue Service. "401(k) Plans." Accessed Dec. 6, 2021.

  8. Internal Revenue Service. "IRS Announces 401(k) Limit Increases to $20,500." Accessed Dec. 6, 2021.