When you think about retirement, what comes mind? You may envision the golden years of leisure and relaxation. Or, maybe your idea of a carefree future is playing golf every day until you die from old age. Retirement isn’t quite as simple as that in reality – sometimes we need to plan for it early on.

The “how is retirement planning different for young adults today from past generations?” is a question that many people ask. The answer to this question is that it’s very different and there are many reasons why.

Yes, you should start retirement planning in your 20s. Here's why

When you’re in your twenties, the last thing on your mind can be the conclusion of your work and the subsequent retirement. However, planning for retirement now might help you secure your financial future.

Even if you’re simply saving a tiny amount, the sooner you start investing, the better. Having a long-term view usually implies you’ll have enough time to ride out the market’s ups and downs.

Furthermore, the sooner you invest, the more time you’ll have to benefit from compound interest, or the returns you receive on returns, which may assist supercharge your capacity to save. Compound interest is the reason why little sums of money saved and invested today may go a long way compared to much bigger sums saved later. The longer you have, the greater the rewards compound interest may provide.

What is the difference between a 401(k) and a 403(b)?

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Example of Compound Interest

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Assume you’re 25 years old and planning to retire at the age of 65. That allows you 40 years to put money down. At the age of 60, if you saved $100 every month with an average yearly return of 6% compounded monthly, you would have saved around $200,244.

Let’s pretend you waited 30 years, until you were 55, to start saving. You contribute $1,000 every month to your retirement account. You’d only have around $165,698 by the time you’re ready to retire if you began saving smaller sums sooner, with an average yearly return of 6% compounding monthly.

What is The Remainder? The longer you put off starting to prepare for retirement, the more money you’ll have to save later to make up for the shortfall. It may be harder to locate these additional dollars as you become older, depending on your financial status.

Though it may not seem appealing in your twenties to begin saving for retirement, it may out to be more convenient in the long term.

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How to Start Saving for Retirement When You’re in Your Twenties

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Starting a retirement fund involves some forethought if you’re new to investing.

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Step 1: Determine how much money you’ll need to save.

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Setting a goal is the first step in opening a retirement account. Think about when you want to retire and how long you anticipate to remain retired based on your current life expectancy. What type of life would you want to live? And what do you think your retirement costs will be?

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Step 2: Decide on a method of saving.

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You have many alternatives when it comes to investing your retirement funds. In November 2021, the average savings account interest rate was 0.06 percent. Many retirees choose to utilize an investment account, such as a taxable brokerage account or a tax-advantaged retirement savings account, for greater returns.

Keep in mind that investing in stocks or other assets is riskier than saving accounts, but the potential for higher returns is greater. Young investors, on the other hand, may often take on more risk since they have more time to recover following a market downturn.

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Step 3: Get started with your investments.

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Your investing plan is determined by your age, objectives, time horizon, and risk tolerance after you’ve created an account. For example, the longer you have before you retire, the more money you can put into riskier assets like stocks, since you’ll have more time to ride out any market downturns. As you get closer to retirement, you may want to shift more of your portfolio to less risky investments like bonds.

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Different Kinds of Retirement Plans

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If you want to start a tax-advantaged retirement account, you have three options: 401(k)s, regular and Roth IRAs, and SEP IRAs.

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1. 401(k)

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If your business provides it, a 401(k) is an employer-sponsored retirement plan in which you invest via your employment. Contributions to 401(k)s are normally withdrawn from your paycheck as pre-tax cash (i.e., contributions decrease your taxable income). Your 401(k) will usually have a limited selection of options from which to pick.

Employers may also make contributions to your 401(k), and many times will match your donations. Consider putting aside enough money to meet your employer’s match, which is practically free money and a significant portion of your overall income.

A Roth 401(k) is a kind of 401(k) that uses after-tax paycheck deferrals.

Individuals may contribute up to $19,500 per year in 2021 and $20,500 in 2022 to their 401(k). Those aged 50 and older may be eligible to contribute an additional $6,500.

Money saved in a 401(k) grows tax-deferred, and withdrawals made after age 59 12 are subject to normal income tax. If you take money out before then, you may incur income taxes as well as a 10% penalty for early withdrawal.

By the age of 72, you must begin taking required minimum distributions (RMDs) from your account.

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2. Traditional Individual Retirement Account

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Employer-sponsored traditional IRAs are not available. Anyone with a source of income is eligible to open one. You may be eligible to deduct payments to a conventional IRA from your taxes depending on your income and access to other retirement savings accounts.

Traditional IRA withdrawals, like 401(k) contributions, are taxed after age 59 12, and early withdrawals may be taxed and penalized.

Traditional IRA contribution limitations for 2021 and 2022 are $6,000 per year for individuals under 50 and $7,000 for those over 50. IRAs, as opposed to 401(k)s, allow people to invest in a considerably greater variety of assets. Within the account, these assets may grow tax-deferred. RMDs are also required for traditional IRAs at the age of 72.

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3. Roth Individual Retirement Account

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Unlike 401(k)s and regular IRAs, Roth IRAs are funded using after-tax earnings and do not give a tax advantage right away. Money in the account, on the other hand, grows tax-free and isn’t subject to income tax when withdrawn after age 59-and-a-half.

You may take your capital (but not your profits) out of a Roth at any time without incurring a penalty. RMDs are not applicable to Roths.

Traditional IRAs have the same contribution limitations as Roth IRAs.

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Investing in a Variety of Accounts

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Traditional and Roth IRAs are both available to individuals. However, keep in mind that the contribution restrictions apply to both total contributions. So, if you’re 25 and contribute $3,000 to a standard IRA, you may only contribute $3,000 to a Roth.

You may contribute to both a 401(k) and an IRA, but you may not be able to deduct your IRA contributions if you have access to a 401(k) at work.

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Strategies for a Successful Retirement

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Your investing plan will be mostly determined by three factors: your objectives, time horizon, and risk tolerance. These considerations will assist you in determining your asset allocation, as well as the kinds and proportions of assets you possess. Your retirement portfolio as a 20-something investor will most likely look substantially different from a 50-something person’s retirement portfolio.

Those with a high risk tolerance and a lengthy time horizon, for example, may invest more in equities. This asset class has a higher volatility than bonds, but it also has a higher growth potential.

The bigger the amount of bonds in a person’s portfolio, the shorter their time horizon is and the lower their risk tolerance is. This graph depicts different portfolio strategies as well as the asset allocation that may be associated with them.

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The Remainder

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Even if you don’t have a lot of money to invest, putting aside as much as you can as soon as you can may go a long way toward saving for retirement. As you begin to make more money, you may gradually raise the amount of money you save.

More information is available at:

This article originally appeared on SoFi.com and was syndicated by MediaFeed.org.

 

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Saving for retirement is important. It’s one of the most important things that you can do in your life. If you want to retire at a certain age and have enough money, then it’s important to start planning early. Reference: why is it important to save for retirement early.

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