Top 5 Reasons To Start Saving For Retirement In Your 20's

Imagine reaching your 60’s and realizing you cannot afford to retire - what would you do?

This is the unfortunate reality for many across the world.It doesn’t need to be you if you focus on the most valuable asset you have. No, it isn’t your money. It is your time.

Being in your 20’s, time is on your side. This means you can potentially invest less starting at 25 than if you had started at 35 and still reach your goal to retire.

Let’s dive in.

1. The Power Of Compound Interest

The S&P 500 SPY has returned 10.51% with dividends reinvested since 1971 according to Forbes. Let’s say you’re making $70,000 per year and you invest 10% of your income ($7,000 per year) beginning at age 25 until age 65. Using that rate of return, you would have $3,560,488.00.

BUT… if you waited until 35 and invested double that amount ($14,000 per year), you would only have $2,537,171.20 at 65.

This phenomenon is known as compound interest. The earlier you start, the longer your money can multiply. 

2. Early Habit Formation

If you wake up one day and realize you’re way behind on retirement, you might push it off because you “already did this long.” You won’t change until the pain of staying on the track you’re on is higher than the pain of changing. Starting earlier is easier than changing later.

If you build the habit of saving in your 20’s, it will be easier to maintain the habit as you make more money. It’s like going to the gym. If you went all through high school and college, it has become part of your routine and lifestyle. Savings is no different.

3. More Time To Recover From Down Markets

Through its history, the S&P 500 or “the market” has had more positive than negative years, but the down years will come. There has been The Great Depression in 1929, Black Monday in 1987, Dot com bubble in 2000, and of course The Financial Crisis in 2008.

These sound scary, but they can be your best friend when time is on your side. Market crashes mean lower prices in the markets. Meaning you can buy more shares with less money. When the world spins around, you’ll benefit if your investments grow. Even if they don’t immediately, you have the years ahead of you to weather the storm that downturns bring.

4. Taking Advantage Of Your Employer Match

I want you to shift your mindset around your employer match being free money. Your employer match isn’t “free money.” It’s your full compensation. If you’re fortunate enough to have an employer with a 401(k) that matches your contributions for retirement, do me a favor and take advantage of it.

On our same example of a $70,000 salary, let’s say your employer matches 5% of that for retirement ($3,500). Using our average S&P 500 return from Forbes above of 10.51%, this would become an additional $1,780,244.00 at 65. This is a no brainer to take advantage of your employer match.

5. Flexibility And Freedom

Starting early means more options. Because of compound interest illustrated above, you can afford to save less later because you started sooner. Now you can use that extra money to live your life, enjoy your family, and buy experiences along with things you want to enjoy.

Tips To Get Started

Create a budget and understand how much is actually left over every month when you pay your bills and live your life within reason. Once you have that number, first set contributions to your employer’s 401(k) plan to get the full employer match. Next consider factors such as risk tolerance and liquidity needs before choosing where any money above that goes. For example, if you have a need for funds in the near future, a 401(k) may not be the best place for all of your money because there are restrictions and potential penalties on accessing those funds before 59.5 years old.

In conclusion, the sooner you start investing, the higher chance of success you will have. Begin early and develop the necessary habits while educating yourself and you’ll be set up for success. If it’s too overwhelming to do yourself, I recommend consulting a financial professional.