It’s easy to understand why retirement isn’t a priority in your 20s. You’re more concerned with kick-starting your career, not ending it in the distant future.
However, being young gives you an edge if you want to build wealth for retirement. You have time to take advantage of compounding interest, so you can save a little now and reap big rewards later.
Don’t pass on the opportunity to get a jump-start on saving for retirement. Here are five tips for maximizing your retirement savings in your 20s.
1. Start saving ASAP
There are plenty of reasons you may have yet to save. Funding a 401(k) may seem difficult if you’re struggling to pay off student loans or cover rent.
But be wary of letting expenses become an excuse. The longer you put off saving, the more it will set you back in the long run. Take a close look at your budget and look for areas where you can cut your spending. Check out these tips for saving more money.
2. Sign up for that 401(k)
If you’re eligible to participate in a 401(k) at work, do so. Most employers match your contributions in order to encourage your participation.
When you sign up, the money you save will be automatically deposited into the plan before it’s taxed, so less of your income will be taxed now. That saves you money, too.
Contribute as much as you can, but don’t leave yourself strapped for cash. For 2017, the maximum pretax annual contribution is $18,000. This 401(k) calculator shows you how much you’ll have saved at retirement at various contribution rates.
3. Open a Roth IRA
If you aren’t eligible for a retirement fund at work that gets you matching funds, sign up for a Roth IRA. You’ll fund it with money that’s already been taxed as part of your normal paycheck. But when you withdraw the money in retirement, it will be tax-free.
This year, you can put up to $5,500 in a Roth. If you can’t save the max, save what you can; it will add up.
To make sure you stick to saving, have a portion of your paycheck automatically deposited into the Roth each month or every few weeks.
4. Be aggressive with your investments
Play it aggressive and put a high percentage of your portfolio in stocks. When you’re in your 20s, you have a long investment horizon, so you can handle the ups and downs of the market.
Check out this asset allocation calculator to create a balanced portfolio of investments that fits your time horizon and risk tolerance.
5. Build an emergency fund
Start building an emergency fund so you don’t have to rely on credit cards — or worse, your retirement savings — for unexpected expenses. Ideally, you’ll stash up to three months’ living expenses, but the important goal is to save something. Set up automatic deposits made to your emergency account to stay on track.
Having an emergency fund in a liquid place savings account or money market account could prevent you from dipping into your retirement savings when your car breaks down or you have to replace your roof. If you withdraw money from a retirement account too soon, you’ll be taxed heavily.