4 Retirement Planning Tips for Young Adults to Start Today

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Retirement Planning

When it comes to retirement planning, it’s always best to start as early as you can. The earlier you begin saving, the more money you can place in retirement vehicles like IRAs and 401(k)s that accrue compound interest, which can grow your nest egg exponentially. As a young adult, saving for retirement might not be top of mind, especially when you have student loans, rent, and car payments to make, on top of enjoying your youth. However, there are plenty of ways you can get a head start on your retirement savings without hindering your 20s and 30s. Take a look at our four retirement planning tips for young adults to start today.

1. Calculate how much you need for retirement

As you start thinking about saving for retirement, it’s important to set goals and calculate what you need to retire.  Using a retirement calculator, you can input key metrics such as your age, current savings, current income, monthly retirement spending, when you want to retire, and much more. Using those metrics, you can build a plan for how much you want to save each month for retirement, which will influence the other retirement planning tips outlined in this post.

2. Take advantage of your employer-sponsored 401(k)

If you work for an employer who offers a 401(k), it’s best to take advantage of it right away. With a 401(k) account, you can allocate a portion of your monthly paycheck to go into your 401(k) account, which can grow over time thanks to compound interest. If you’re lucky enough to have a generous CEO who offers a 401(k) match, you’ll grow your savings even more. 

Retirement Planning

With a 401(k) match, your employer might agree to match a portion of your retirement savings and a certain portion of your total salary. For example, your employer might agree to match 100 percent of your contributions up to 3 percent of your salary. If you make $60,000 and max out your contributions, this means your employer will contribute $1,800, as long as you contribute $1,800 as well.

3. Open up an IRA

An individual retirement account (IRA) is an excellent way to begin saving for retirement as a young adult. If your employer doesn’t offer a 401(k), you work in the gig economy, or if you have a 401(k) and want to set aside more money for retirement, an IRA can be a great option.

There are a few types of IRAs, with the two most common being:

  • Traditional IRAs: With a traditional IRA, you can contribute $6,000 during 2020, with these contributions being tax-deductible. Once you enter retirement and begin taking withdrawals, the investment earnings will be taxed.
  • Roth IRAs: With a Roth IRA, you can also make an annual contribution of $6,000 for 2020. However, contributions are not tax-deductible, but withdrawals during retirement are completely tax-free.

IRAs are great ways to set aside money for your golden years. Depending on your preferences, you can choose to lower your tax liability for the current year with a traditional IRA, or choose to take out tax-free withdrawals during retirement with a Roth IRA.

4. High-yield savings account

Retirement vessels like 401(k)s and IRAs are great in that they’re both tax-advantaged retirement savings accounts. However, you can only contribute up to a certain amount each year, and withdrawals before you reach retirement can face a penalty.

If you want to save for retirement while still having access to your savings, consider setting aside some money in a high-yield savings account. High-yield savings accounts are like traditional savings accounts, but come with much higher interest rates, which means you can practically earn free money for keeping your savings secured in that account. These accounts are much more lenient, but some might only allow you to withdraw a few times a month penalty-free.

Retirement Planning Wrapping up

Once you graduate college or enter the workforce, it’s important to begin saving for various life expenses, such as a car, home, and retirement. While retirement might not sound thrilling when it’s decades away as a young adult, it’s important to act early and save as soon as possible. This way, you can have more money set aside for you to enjoy your sunset years like you envisioned, whether it be traveling the world or buying a small cottage on the ocean.