It’s never too early to think about retirement planning. In fact, the earlier you start saving for retirement, the better chance you have to retire comfortably.
To some, setting aside retirement savings in your 20s may seem too early. However, based on retirement savings calculators, if your money has an eight percent rate of return and you wait until age 32 to start saving, you will have to contribute more than twice as much per year to reach the same retirement savings goal as someone who started at 22. No matter what your income, budget or retirement dream, start planning for the future with these savvy retirement planning tips and turn your golden years platinum.
Establish a personal savings account
With new expenses, college loans, and often limited income, saving in your 20s isn’t always easy. But it’s important to get into the habit of setting money aside now, so you have it when you need it. If you don’t already have a personal savings account, open one and start contributing on a weekly or monthly basis. It doesn’t matter how much or how little you can contribute, as long as you try to save money whenever you can. Even if you contribute just $20 a week, by the end of the year you’ll have $1,040, enough to open a retirement savings account like a Traditional or Roth IRA. Consider regulating your savings for retirement with automatic transfers or direct deposits into your personal savings account each month. You can save without even thinking about it!
Create a retirement savings road map
Ask yourself, at what age would you like to retire, and how much money would you like to have to live on? You don’t have to have your retirement savings goal nailed down right now, but it’s wise to have an idea of where you want to be so you can find out how you’re going to get there.
Use a retirement fund calculator to determine how much you should be saving a month in order to reach your golden years’ goal. For example, if you’re 28 and want to save $1,000,000 by the time you’re 65, you should be contributing around $5,000 a year to a retirement account that has an eight percent return. That’s $416 a month you need to start saving now. While you may not be able to anticipate all your future expenses, you can consider what annual salary range you’d like to have during retirement and work to save enough for that.
Participate in your employer’s 401(k) plan
According to a 2012 study by ScottsTrade, in 2011, only 37 percent of employed members of Generation Y participated in their employer’s 401(k) plan. Likewise, only 63 percent of Generation Y holds a tax-deferred account like an IRA, the smallest percentage of any generation. Luckily, this is an easy fix for all Gen Yers. Not only can you automatically contribute what you want to a 401(k), but many employers match a percentage of your contributions. That’s free money toward your retirement savings.
For example, if you’re 25 and make $40,000 a year, contribute five percent of your income to your 401(k), and your employer matches your contribution by 50 percent, you can expect to save around $800,000 by the time you’re 65. And that’s only if your income stays at $40,000 and you keep your yearly contribution low. As you gain experience and earn raises, or land better, higher-paying jobs, you can increase your monthly contributions to 401(k) accounts.
Open a Traditional or Roth IRA
Even if you’re already contributing to a 401(k), consider also opening a Traditional or Roth IRA (Individual Retirement Account). Each year you will be able to make tax-deductible contributions up to a certain amount determined by your income. If you are contributing to both a 401(k) and IRA, the tax-deductible amount you can contribute may decrease as your salary increases. Be sure to look into current IRS regulations before opening an IRA.
You can also look for an institution with an IRA savings plan that will help you build up funds for retirement accounts but without early withdrawal penalties. This can be a good way to save toward a goal while maintaining more liquidity. It’s important to compare the benefits and features of IRA account structures to find the best tool for saving in your 20s. Keep in mind, there are federally regulated annual contribution limits to both types of IRA accounts, so be sure you plan appropriately.
- Traditional IRA: Contributions are tax-deferred and so are earnings, but distributions are taxable. Speaking to a tax advisor can help you decide if this is the right move for you.
- Roth IRA: Contributions are not tax-deductible but earnings grow tax-free and qualified distributions are tax free. Since there is an income ceiling with a Roth IRA, it may be a good retirement savings option for 20-something’s with lower income. Plus, the tax-free and penalty-free structure for qualified deductions may allow more liquidity that Generation Y needs to pay for school loans, down payments on a home or emergency medical bills.
A balanced portfolio may include both of these options, a 401(k), and an IRA savings plan or CD.
Speak to a tax advisor learn more about saving for retirement in your 20s
No matter what vehicles you use in your retirement planning, it’s important to get a jump start on saving now. Set aside $10 to $20 each month to start, and grow your contributions to a retirement savings account as you are able. A tax advisor or representative at your local bank can help you examine retirement savings plans more closely to find the right fit.
Sponsored content was created and provided by RBS Citizens Financial Group.
Photo by Philip Taylor PT