It is exciting when you get your first real job with a solid paycheck. However, it can be daunting when you also begin to have real financial obligations, like paying rent or a mortgage, paying off student debt or financing a car. Saving for retirement when you are in your 20s may seem less important than these immediate concerns, but saving early is the key to enjoying a comfortable retirement later.
Start Investing Early
The single most important step in your retirement strategy is to begin saving in a retirement fund as soon as you have steady employment. Saving over a longer time is beneficial because the interest that your money earns each year is plowed back into your account, where this interest will then itself earn interest. This is called compounding interest, and it is crucial for building long-term wealth.
It is critical to set specific goals for your career and retirement that are clear. There are different philosophies about the pros and cons of paying off debt versus saving for retirement, but the bottom line is that both strategies are important. If you have debt, map out a plan to set aside specific amounts for paying down debt and saving for retirement. Make sure your goals follow criteria that are conducive to success. A good strategy is to have amounts deducted automatically from your paycheck into a retirement account. If your employer has an employee match option, make sure you contribute at least up to that percentage. Try to increase your savings percentage each year or every couple of years.
Set Up Taxable and Non-Taxable Accounts
When you retire, you will be able to start drawing money from your retirement accounts. These accounts may be a 401k with your employer, some type of individual retirement account (IRA) or both. Depending on the type of account, this money will be taxed or not when you withdraw it. If you contribute money after you have already paid taxes, then you will not owe any additional taxes on either that amount or the interest it has earned. If you contribute money before you have paid taxes on it, you will owe taxes on the contributions and the earned interest when you take it out. Both strategies are advantageous in that you save paying taxes now on any pre-tax contributions and save paying taxes later on after-tax contributions. Many people advise combining a mixture of both savings options.
It is important to realize that you are in charge of your own financial destiny. No one else is going to save for your retirement. Start early and start well in order to end successfully.
Here’s another article you might find helpful: 3 Facts About Social Security You Probably Didn’t Know