When you’re in your 20s, retirement might seem like a distant dream. After all, it’s decades away, and there’s a lot to focus on right now—student loans, building your career, perhaps buying a home, or just trying to keep your head above water financially. But starting to save for retirement in your 20s can set you on the path to financial freedom and ensure that you’re not scrambling when the time comes to retire. In fact, the earlier you start, the more time your money has to grow—and the less you’ll need to save in the long run.

So, how do you begin? Here’s a step-by-step guide to help you start saving for retirement in your 20s, no matter where you’re at financially.

1. Start Early—The Power of Compound Interest

The key to building wealth over time is compound interest—earning interest on both your initial investment and the interest that accumulates. The earlier you start saving, the more you benefit from compound interest because your investments will have more time to grow.

For example, let’s say you start saving $200 a month for retirement at age 25, and your investments grow at an average rate of 7% annually. By the time you’re 65, you’ll have over $600,000, even though you only contributed about $96,000 of that yourself. Start later, and you’ll need to save much more each month to achieve the same result.

The earlier you start, the less you’ll need to save to build the retirement nest egg you need.

2. Create a Budget and Find Room to Save

The first step to saving for retirement is ensuring you have enough room in your budget to make regular contributions. Even if it’s just a small amount at first, every dollar you save now puts you ahead of the game.

Here’s how to make room for retirement savings:

• Track your spending: Use an app or a simple spreadsheet to track where your money goes. Look for areas where you might be overspending (like dining out or impulse buys) and cut back where you can.
• Pay yourself first: Treat your retirement savings like a fixed expense. As soon as you receive your paycheck, set aside a percentage for retirement before paying bills or spending on discretionary items.
• Prioritize high-interest debt: If you have credit card debt, focus on paying it off as quickly as possible. The interest on high-interest debt can eat into your ability to save, so getting rid of it should be a priority.

Even small contributions in your 20s can add up, so aim to start saving something—even if it’s just $50 a month—and then gradually increase that amount over time.

3. Take Advantage of Employer-Sponsored Retirement Accounts (401(k) or 403(b))

If your employer offers a 401(k) (or a similar retirement plan like a 403(b) if you work for a nonprofit), this should be one of your first stops when you begin saving for retirement. Employer-sponsored retirement accounts are often the most efficient way to save for retirement because:

• Employer matching: Many employers offer a matching contribution up to a certain percentage. This is essentially free money. For example, if your employer matches up to 3% of your salary, that means you can double your contribution without any extra effort on your part.
• Tax advantages: 401(k) contributions are made with pre-tax dollars, which means you reduce your taxable income for the year. Additionally, your money grows tax-deferred, so you won’t pay taxes on it until you withdraw it in retirement.

How to maximize your 401(k):

• Contribute enough to get the full match: If your employer offers a match, aim to contribute at least that amount. Otherwise, you’re leaving money on the table.
• Increase your contributions over time: As you get raises or promotions, try to increase your retirement savings contributions. Even a small increase can add up over time.

4. Consider Opening an IRA (Individual Retirement Account)

If you don’t have access to an employer-sponsored retirement plan, or if you want to supplement your 401(k) contributions, consider opening an IRA. There are two types of IRAs to choose from:

• Traditional IRA: Contributions to a traditional IRA are tax-deductible, meaning you pay less in taxes now. Your investment grows tax-deferred, and you’ll pay taxes on withdrawals when you retire.
• Roth IRA: Contributions to a Roth IRA are made with after-tax dollars, so you won’t get an immediate tax deduction. However, your money grows tax-free, and you won’t have to pay taxes on withdrawals in retirement.

Which one should you choose?

• If you expect to be in a lower tax bracket when you retire, a Traditional IRA might be the right choice, since you’ll get the tax break now.
• If you expect your income (and tax bracket) to rise in the future, a Roth IRA may be a better option, as your withdrawals will be tax-free in retirement.

Both options allow you to contribute up to $6,500 a year (as of 2024), or $7,500 if you’re over 50. Even small contributions can make a big difference over time.

5. Automate Your Savings

One of the best ways to stay consistent with retirement savings is to automate your contributions. Set up automatic transfers from your checking account to your retirement account each month. This way, you’re saving without having to think about it.

Most 401(k) plans and IRAs allow you to set up automatic contributions, so you can ensure that saving for retirement is always a priority. You’ll be surprised how quickly small, automatic transfers can add up over time.

6. Invest Early, Even if It’s Just a Little

It’s natural to be hesitant about investing, especially when you’re just starting out. But in your 20s, you have the luxury of time on your side, and that means you can afford to take on a little more risk with your investments. The earlier you start investing, the more time your money has to grow.

Start with low-cost, diversified investments like index funds or ETFs (Exchange Traded Funds). These funds track the overall market, so you don’t have to worry about picking individual stocks. They offer broad exposure to a variety of asset classes, helping to reduce risk while providing potential for growth.

If you’re unsure where to start, consider talking to a financial advisor or using a robo-advisor, which can automatically select and manage your investments for you.

7. Be Consistent and Avoid Early Withdrawals

It’s easy to be tempted to dip into your retirement savings for short-term needs, but doing so can set back your progress significantly. Retirement accounts are designed to help you build wealth over the long term, so avoid withdrawing early unless absolutely necessary.

Even if your contributions start small, consistency is key. Make saving for retirement a regular habit, and remember that even small contributions will grow over time, thanks to compound interest.

Conclusion

Starting to save for retirement in your 20s is one of the best financial decisions you can make. By beginning early, contributing regularly, and taking advantage of tax-advantaged accounts like 401(k)s and IRAs, you can build a solid foundation for a comfortable retirement.

The sooner you start, the less you’ll need to save each month to achieve your retirement goals. So, start today—even if it’s just a small contribution. Your future self will thank you!

Are you already saving for retirement? What steps are you taking to ensure a secure financial future? Share your tips or questions in the comments below!