5 Tips For Saving For Retirement In Your 20s

It’s easy to understand why saving for retirement isn’t a priority in your 20s — a decade when advancing your career seems more important than planning for the end of it.

But youth is a huge advantage when it comes to building wealth for retirement because it gives you time to maximize the power of compound interest. With compounding, you can save a little now and reap big rewards later.

Don’t pass up the opportunity to get a jump-start on saving for retirement. Here are five tips for maximizing retirement savings in your 20s.

1. Start saving today

You can probably find plenty of reasons not to save money. Funding a 401(k) seems impossible if you’re struggling to pay off student loans or cover your rent.

But letting expenses become an excuse is a mistake. The longer you put off saving, the more it will set you back in the long run. Take a close look at your budget and look for areas where you can cut your spending. Try to save at least 10 percent of your income.

2. Sign up for your employer’s 401(k)

If you’re eligible to participate in a 401(k) at work, do so. Some employers match your contributions to encourage your participation.

When you sign up, the money you save is automatically deposited into the plan before it’s taxed, so less of your income will be taxed now. In effect, the government is giving you a tax break today to save for retirement.

Plus, you’ll get another serious advantage. The 401(k) allows your savings to grow tax-free until you withdraw the money at retirement. This feature means your money will compound at a faster rate. Only when you withdraw money will you pay taxes.

Maximize employer benefits

Many employers will match 401(k) contributions up to a certain amount— and that’s a powerful way to increase your returns. Contribute as much as you can and try to take full advantage of your employer’s matching contribution.

For example, if your employer contributes $1 for every $1 you save, up to 6 percent of your pay, do your best to contribute 6 percent. That’s a 100 percent immediate return on your saved money — plus you’re saving on taxes, too! If you can, try to bump up your contributions when your income increases, like if you get a raise. 

Some employers also offer health savings accounts (HSA), which are tax-advantaged savings accounts that let you set money aside for qualifying medical expenses. If your contributions for this type of account are deducted from your pay, you can lower your taxable income by the amount you contribute, and the interest accrued in these accounts isn’t taxable. There’s no time limit on when you need to use the funds in this account, so taking advantage of this employer perk can really pay off.

3. No 401(k)? Open a Roth IRA

If you aren’t eligible for a retirement fund at work that gets you matching funds, sign up for a Roth IRA. In fact, even if you do have a workplace retirement plan, it’s a good idea to have a Roth IRA. You’ll fund it with money out of your paycheck that’s already been taxed, but when you withdraw the money in retirement, it will be tax-free.

While a Roth IRA won’t save you money on taxes this year, it’s a fantastic way to avoid paying taxes on your future investment earnings. This benefit might be the most important, but the Roth IRA has a number of other powerful features that make it a top account for those looking to amass wealth.

In 2025, you can put up to $7,000 in a Roth as long as your income doesn’t exceed a certain amount, (and later on, when you hit 50, you can make an additional $1,000 annual catch-up contribution.) If you can’t save the max, save what you can; it will add up. To make sure you stick to saving, have a portion of your paycheck automatically deposited into the Roth on a regular basis.

4. Be aggressive with your investments

Put a high percentage of your portfolio in stocks. While stocks are one of the most volatile types of investments, they also have a great long-term track record, too. So the more you can invest in them, the more wealth you should be able to amass. When you’re in your 20s, you have a long investment horizon, so it should be easier to handle the ups and downs of the market.

Check out this asset allocation calculator to create a balanced portfolio of investments that fits your time horizon and risk tolerance. As you get older and closer to retirement, you can move more of your assets into less volatile investments, such as bonds.

Understand the impact of inflation and risk 

While it may be tempting to squirrel your money away in low-risk vehicles like fixed-income funds or high-yield savings accounts (HYSAs), being too safe early in your investing journey can be risky, too. 

That’s because you need your money to keep up with inflation — and the way to do that is to earn a return on your investment that is higher than the rate of inflation. The S&P 500, which is the benchmark commonly used to track the performance of the U.S. stock market, sees a return of roughly 10 percent on average. That’s much higher than what you’d see if you stashed your cash in a savings account. 

Explore diverse investment options 

A key part of long-term investing is having a diversifed portfolio. That can mean exploring different assets — such as real estate, in addition to stocks and bonds — but it also means investing in assets of different sizes and sectors. 

For instance, if your portfolio is filled with technology stocks, they’ll all tank at once if the tech sector underperforms. But if you also invest in industrials and health care stocks, for example, some of your portfolio may be able to hold up — or even outperform — while another part of it is suffering. Financial advisors also recommend investing in both U.S. and international securities to add diversification to your portfolio.

5. Build an emergency fund

Start building an emergency fund so you don’t have to rely on credit cards, or worse, your retirement savings, for unexpected expenses such as a car repair. Ideally, you’ll want to save up to six months’ worth of living expenses.

Set up automatic deposits to a high-yield savings account to stay on track. Having emergency cash in an easily accessible savings or money market account could keep you from dipping into your retirement funds if your car breaks down or you suddenly need a new iPhone. If you withdraw money from a retirement account too soon, you’ll be taxed heavily.

Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.

— Bankrate contributor Mallika Mitra contributed to updates of this article.