Many people don’t start funding an IRA or 401(k) for retirement savings purposes until they’re well into their careers. And that makes sense to some degree.
It’s hard to focus on retirement savings in your 20s — especially in your early 20s — when that milestone is so far away. And also, when you’re new to your career, your salary may not be that high. So you might need your entire paycheck to cover things like your rent, car payments, and credit card bills.
But while saving for retirement as an early 20-something may not be the easiest thing, it’s a thing worth doing. Here’s why.
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1. You might enjoy more growth in your portfolio
The money in your IRA or 401(k) shouldn’t just sit in cash. You should invest it so it grows into a larger amount over time. And the more time you give your money to grow, the higher a balance you might enter retirement with.
Over the past 50 years, the stock market’s average annual return has been 10%. If you contribute $5,000 to an IRA or 401(k) at age 22 and are able to enjoy that same return, by age 62, that $5,000 will have grown to about $226,000. Make that same contribution at age 32, and by 62, you’re looking at more like $87,000. That’s still a really nice gain, but it’s nowhere close to as high as $226,000.
2. You might have an easier time finding the money to contribute
You might earn a lower wage in your early 20s than in your 30s, 40s, and beyond. But one thing you may have going for you at that stage of life is that you’re not yet a homeowner or parent.
Of course, this isn’t a given. There are people in their early 20s who own property and have kids. But if those are milestones you haven’t reached, you may have an easier time finding the money to contribute to an IRA or 401(k) in the absence of having a mortgage or needing to pay for child care.
3. It may lead to an early retirement
A lot of people dream of retiring early. But it’s fair to say that someone retiring in their early 50s needs a larger nest egg than someone retiring in their mid-60s, since their money needs to last longer. If you start saving for retirement during your early 20s, you might grow enough wealth to make early retirement possible.
Let’s say you’re able to save $500 a month for retirement between the ages of 22 and 52, all the while enjoying a 10% average annual return on your money. That leaves you with a nest egg worth about $987,000. And you might feel comfortable wrapping up your career in your early 50s knowing you’re sitting on close to $1 million.
But if you don’t start contributing that $500 a month until age 32, you’ll end up with around $344,000 by age 52, assuming the same return as above. That may not be enough savings to pull off an early retirement.
There are plenty of benefits to saving for retirement during your early 20s. And remember, saving for retirement doesn’t have to mean maxing out your IRA or 401(k). If that’s not doable at that point, don’t sweat it. Instead, save to the best of your ability. You can always increase your contributions as your wages rise. But this way, you’re getting off to a solid start.
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