Here’s How Much You Should Be Saving for Retirement Every Year in Your 20s
When you’re in your 20s, you might not be thinking that seriously about retirement yet.
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Chances are, you’re still finishing up college or have recently graduated — if you went down that route. You might only now be working your first job that pays more than minimum wage and, perhaps, even comes with employee benefits — like a 401(k) plan and healthcare.
Retirement probably feels far away, and why shouldn’t it when the average person doesn’t retire until their 60s? But just because that’s the average age doesn’t mean you want to wait that long. Maybe you want to retire early. Or maybe you just want to set yourself — and your family — up for long-term prosperity.
Whatever the case, you’ve got as much time on your side now as you’ll ever have. And that means you’re primed to start saving for retirement — even if those initial savings might be a little small.
There’s no one-size-fits-all answer to how much you should be saving for retirement in your 20s. Your retirement plan will be based on your goals, needs and financial situation. It’ll probably change as you get older and live your life, too.
That said, here are some general rules you can follow to get you on the right track.
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Save 10%-15% of Your Annual Income
A general rule of thumb is to start saving at least 10% of your income each year — though 15% or more is better. Of course, you’re going to have other bills to pay, and possibly student loans, but getting started with this savings habit early will benefit you in the long run.
“In your 20s, the magic number for annual retirement savings is about 15% of your income,” said Justin Godur, a financial advisor and the founder of Capital Max.
“This decade is a golden opportunity to leverage the power of compounding. Remember, every dollar saved in your 20s could potentially be worth much more by the time you retire, thanks to compounding interest.”
Here’s an example of how compounding interest works:
Say you have $5,000 at the age of 25 and put it into a high-yield savings account with an average yearly return of 7%.
If the interest compounds monthly, you’d have nearly $82,000 by the time you’re 65 years old — assuming you don’t make any other deposits or withdrawals. If it compounds yearly, you’d have about $75,000.
Now, say you earn $40,000 a year. Following the 15% rule, you should be saving $6,000 a year. If you add that amount to the account with the initial $5,000 deposit — and the interest compounds annually — you’d have an estimated $1,272,000 by the time you’re 65. And again, this is assuming you don’t change how much you save.
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Follow the 1X Rule
By the time you turn 30, you’ll ideally have saved up the equivalent of one year’s salary. This is called the 1x rule.
This rule won’t work for everyone, of course. After all, each individual has their financial obligations, retirement goals and the like. It can, however, serve as a guideline.
So, if you’re in your 20s right now earning $40,000 a year, you should have $40,000 in savings before you hit 30. If your income increases to, say, $55,000 when you’re 28, aim to have the higher amount saved up.
Take Advantage of Retirement Plans
If saving that much money seems impossible, try not to fret. There are ways to make it happen, one of which is to use tax-advantaged retirement plans.
“Start by setting up a 401(k) if your employer offers one, especially if they match contributions — it’s essentially free money. If a 401(k) isn’t available, open an IRA,” said Godur.
Some retirement plans have annual contribution limits. For example, the current limit for IRA contributions is $7,000. The annual limit for 401(k)s is currently $23,000. You can have both an IRA and a 401(k), giving you a maximum yearly limit of $30,000.
Prioritize Paying Off Debt
If you have debt — whether it’s credit cards or student loans — focus on paying that off first. The interest charges can seriously set you back when it comes to retirement savings.
“The quicker people in their early 20s can pay off debt like student loans, the sooner they can start a lifelong savings plan,” said Paul Tyler, chief marketing officer at Nassau Financial Group. “That also includes thinking twice about putting that fun trip with your friends on a credit card and not paying it off.”
Invest As Much As You Can
Investing can help your savings grow, though it does come with some risk. Still, if you’re going to take risks, your 20s are the time to do so.
Certified financial planner (CFP) and the founder of Crest Wealth Advisors, Jason Dall’Acqua suggested, “Consider being aggressive with your investment strategy. Time is on your side to recover any losses may incur in the short-term.”
Before you invest, make sure you have some money set aside for emergencies. That way, you can invest and save more aggressively with less financial stress.
“While this may not be directly tied to retirement, make sure to have an adequate emergency fund in place to avoid having to incur debt for any unexpected expenses,” said Dall’Acqua. “Racking up high interest rate consumer debt can have severe negative consequences when trying to plan for retirement.”
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This article originally appeared on GOBankingRates.com: Here’s How Much You Should Be Saving for Retirement Every Year in Your 20s