Why You Should Start Planning for Retirement in Your Early 20s

November 10, 2020
Most people in their early 20s aren’t thinking about retirement; they’re focused on starting their careers and building a life for themselves. However, with the power of compound interest, your early 20s are the perfect time to start saving for retirement. Think about it: you may have fewer time commitments, family obligations, and financial requirements, making it an easier time to save towards retirement. Additionally, starting early helps you build good saving habits. And, while retirement may seem a long way off, investing just $50 a month starting at age 22 could result in over $800,000 in retirement savings over 40 years. 

“When young people come in to open their first banking accounts, we also share information to help set them on course for life-long financial health,” says Jill Erps, Chief Retail Officer at Financial Partners Credit Union. “We give them realistic information on how to get started with savings – and give them practical advice about credit and other important financial tools – so they ideally are informed and avoid financial pitfalls that often impact those just starting their financial journey.”

So how does someone in their 20s prepare for retirement – which is decades into the future?  Erp shares her top tips:

1. Know Your Goals

When you are in your 20s, the idea of making retirement goals when you aren’t sure what career path or life journey you will experience may seem intimidating. However, your retirement goals are not written in stone; as you go through life, your goals will change as aspects of your life change, such as getting married, having children, caring for aging parents, and so on. If you’re ready to jumpstart your retirement savings, there are several great retirement calculators available online. Additionally, there are a lot of great retirement planning  articles and tools, including at MyCreditUnion.gov

You may want to work with your credit union to set up your savings with automatic deposits. This way, are less likely to use those funds to purchase that new cell phone you’ve been eyeing.


2. Growth Over Time

When you’re young, you have the advantage of compound interest. Compound interest works in your favor by allowing you to save a small amount now and allowing those funds to build. Each year that the money sits in high-yield savings accounts at your credit union or brokerage, it gains interest, and overtime, you will earn interest on your interest.

3. Roth IRAs for the Win

Individual Retirement Account (IRA) is simply a type of savings account with an IRA tag that dictates how the government will tax it. You can have regular savings accounts, money market accounts, mutual funds, a 401(k), and more with an IRA tag; this means that typically you cannot touch the funds in the account without a hefty tax penalty until you are 59 ½.

There are two main types of IRAs, a Roth IRA and a Traditional IRA. With a Traditional IRA, contributions are pre-tax, meaning you will pay taxes when you pull the money out of the account at 59 ½ or older. A Roth IRA allows you to fund the account with “after tax” contributions, or money that you have already paid income taxes on, meaning the money you typically see on your paycheck. When you are 59 ½ and choose to pull funds from the account, you won’t be taxed on any withdrawals.

There are advantages to each IRA type, you may want to speak to a retirement specialist at your credit union to determine which is best for you. However, at this stage in your life, as you are planning for the future, starting that new job, and starting to save for retirement, you may want to consider placing your money in a Roth IRA, if you qualify. You could benefit in the long run by stockpiling all of that tax-free growth for yourself.

4. You Can Afford to be Aggressive

Because you are just starting on your financial journey, you have plenty of time to save, which means you can be aggressive with how you save and the types of investment vehicles you choose. There are several investment options available such as stocks, bonds, mutual funds and annuities. When your financial advisor discusses aggressive savings, they are talking about putting your money in a more aggressive mix of investments. These are considered more aggressive because there is a higher risk of losing value but also an opportunity for a higher rate of return. Remember, you are young enough to ride out dips in the stock market. Chances are, if you hold to your strategy, you will gain lost earnings back and continue to build your retirement savings. The key is not to panic; the stock market has historically performed well, given time.


As you age, you may want to reduce the level of risk you are willing to take and move towards a mix of less risky investments. Working with an investment professional can help you develop the appropriate investment strategies for each stage of your life. In fact, whenever there is a major change in your life like getting married, divorced, having children, starting a business, etc., you’ll want to revisit your investment strategy to ensure it is still appropriate. 

“The last thing young adults tend to think about is retirement,” concludes Erps. “However, starting in your 20s can add hundreds of thousands of dollars to your retirement in the long run. Our goal is to educate members in a way that keeps them informed and aware of the full financial picture.”

 



Speak to your financial advisor before making investment decisions.