Retirement Savings Tips for 20-Somethings
Your 20s should be spent enjoying your youth and not worrying about the future, right?
Yes and no: Although it’s certainly true that you’ll never be younger than you are today, it’s worthwhile to start thinking about how you’ll finance your retirement. It may not be one of the most exciting activities, but it’s one of the most important.
401(k) and IRA Contributions
Setting aside money at an early age gives your savings decades to grow. But simply keeping those funds in a checking account won’t do the trick. Instead, consider enrolling in a 401(k) plan and/or setting up an individual retirement account.
A 401(k) plan is usually offered by your employer, who may match your monthly contributions up to a certain amount — typically around 2% to 6% of your pay. These plans have annual contribution limits set by law. For this year, you can put up to $18,000 into a 401(k). Most financial planners recommend that young people begin by contributing up to 10% of their monthly gross income to these plans, with the goal of working their way up to 20%.
Financial institutions like NuMark Credit Union offer IRAs. These investment vehicles let people under the age of 50 stash away $5,500 annually. Those older than 50 can add an extra $1,000 per year. In addition to helping you save for retirement, contributions to both 401(k) plans and IRAs can reduce your taxable income if you meet certain qualifications. But keep in mind that if you or your spouse participates in a 401(k), your IRA contributions may not reduce your taxes.
A Separate Emergency Fund
If you decide to withdraw money from either your 401(k) or IRA before you’re 59½ years old, the IRS will slap you with a 10% early distribution penalty. The IRS will, however, let you borrow 50% of the funds in a 401(k), up to a maximum of half the balance or $50,000, as long as you repay it within five years. If you use the money to buy your main residence, you don’t have to repay it. You should only do this when you’re in a pinch, though, because it limits the future growth of your retirement funds.
That’s where emergency funds come into play. An emergency fund should have enough money to cover three to six months’ worth of living expenses. Since you won’t know exactly when you might need to rely on this rainy-day fund, it’s a good idea to keep it somewhere accessible, like in a simple savings account.
The bottom line
Unlike doing the laundry or hitting the gym, saving for retirement isn’t something you should just put off. IRAs and 401(k) plans are excellent options to make sure your later years will be financially comfortable. It’s simply up to you to get the ball rolling.
Tony Armstrong, NerdWallet