Email FacebookTwitterMenu burgerClose thin

How to Save for Retirement in Your 20s


Saving for retirement is a long-term process, but starting earlier will give you a significant advantage. You will have more time for compounding to take effect and more money in the long run. Being in your 20s will give you time to grow your savings with compounding interest. Although your income is probably low at this stage, saving for retirement now will pay off later in life. Here are six practical steps to start saving money now.

financial advisor can help you create a financial plan for your retirement needs and goals.

1. Determine Your Retirement Goals

Before you start saving for retirement, you must determine your retirement goals. For example, what kind of retirement lifestyle do you want? Will you live a simple life spending time with family and friends, or will you live a lavish life of world travel?

If you plan to spend most of your time at home when you retire, you might need less money than you need today – experts often recommend a retirement income of 80% of your salary while working. But if you want to live a life of luxury when you retire, you might need more money, not less. You should also consider healthcare costs, which can be significant after you retire.

2. Start a Budget

Every person should maintain a budget, but it’s especially important if you want to save for retirement in your 20s. This is because you need extra money at the end of the month even though you likely haven’t reached your highest-earning years.

To create your budget, start by tallying up your monthly expenses. You can do this by listing on a sheet of paper your rent, car payment, groceries, utilities and more. If you pay for most purchases with a credit or debit card, you can also use bank statements to total your expenses.

Any money you have left over is money you can potentially put toward retirement. Experts suggest saving at least 10% to 15% of your income. But if you can’t save that much, it might be time to look for ways to reduce your expenses.

3. Start Saving as Early as Possible

SmartAsset: How to save for retirement in your 20s

If you are considering saving for retirement in your 20s, chances are quite good that you plan to start saving early. And that is a very good thing thanks to compound interest. For long-term savers, compounding can eventually make up most of their portfolio growth.

For example, suppose you start from scratch, save $1,000 per month and earn an average 7% return. While your contributions make up most of the returns for the first several years, that flips by year 20. So, for example, if you start saving at 25 things change when you are 45. At that point, you will have contributed $240,000 of your own money, but have earned $251,945 in interest. By year 40, when you are 65, you will have contributed $480,000 but have earned a whopping $1,915,621 in interest.

Of course, 40 years is a long time, but it could be worth it. A retirement calculator can give you a better idea of how much money you will need when you retire.

4. Automate Your Savings

Put your savings plan on autopilot. First, most online brokers have support for automatic investments these days. They make it easy to transfer money automatically every month or on whatever schedule you prefer.

The other side is that automating your savings and investing makes it easier to stay committed. Not only will you eliminate the chance of forgetting to set money aside, but you’ll also eliminate temptation. When your money automatically goes into a 401(k) or individual retirement account (IRA) every month, you don’t see that money, and you’ll be less likely to spend it instead.

5. Pay Off High-Interest Debt

There is a fine line between debt repayment and retirement savings. High-interest debt like credit card debt or personal loans can have interest rates higher than the stock market, so you must prioritize them.

But you must also carefully balance debt repayment and retirement savings. If you focus all your money on paying off debt, you may miss the benefits of compounding interest and still delay your progress toward achieving your retirement goals. Also avoid taking on new debt if possible, as that will further delay your progress.

6. Re-evaluate and Adjust Your Retirement Plan

Lastly, it’s a good idea to re-evaluate your retirement plan periodically and adjust as needed. Your financial situation, goals and priorities may change over time, so your retirement plan may need to be adjusted to reflect those changes. Consider doing an annual review of your portfolio to see if you are on track to meet your retirement goals. Some wealth management software will do this automatically based on your input.

Major life changes can have a significant impact on your retirement plan. For example, getting married or having children can make a big difference. So, too, can fluctuations in the economy, leading to a tanking stock market or job loss. By re-evaluating and adjusting your retirement plan regularly, you can ensure you’re on track to achieving your retirement goals.

Bottom Line

SmartAsset: How to save for retirement in your 20s

Determine your retirement goals and start saving early to make those goals a reality. Then, make it automatic and review your portfolio periodically. In addition, create – and stick to – a budget and pay off high-interest debt. Finally, periodically evaluate your plan to ensure it’s on pace to produce the goal. These are just a few ways to meet your retirement goals, but you should also meet with a financial advisor.

Tips for Saving for Retirement

  • A financial advisor can guide you through major financial decisions, like determining your investing strategy. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • Deciding how to invest can be a challenge, especially when you don’t know how much your money will grow over time. SmartAsset’s investment calculator can help you estimate how much your money will grow to help you decide which type of investment is right for you.

Photo credit: ©, ©, ©