How to Save for Retirement in Your 20s and 30s

Whether you’re in your 20s and just starting out or in your 30s, it’s important to establish good money habits. Start by getting your hands on your most recent bank and credit card statements to categorize your expenses.

Creating a budget can help you save for the things you want, while still living within your means.

Start Early

When you are in your 20s and 30s, retirement may seem so far off that it’s easy to put off saving for it. But saving even a small percentage of your income now can help you achieve a financially secure retirement later in life.

Set retirement goals that reflect your aspirations and financial realities. Start by estimating how much annual income you’ll need in retirement to maintain your current lifestyle. Consider commuting costs, dining out and other daily expenses, and factor in any additional healthcare costs.

Make a budget that prioritizes savings and investing. You may also want to set up an emergency fund that covers three to six months of living expenses. Cut back on extra spending and evaluate high-interest debt. Evaluate and adjust your budget regularly as your income or expenses change.

Diversify your investments to maximize the potential of compound interest. Choose stocks with growth potential that offer higher returns than bonds. Consider using mutual funds or ETFs to invest in many stocks at once and spread your risk. Also, consider a variety of investment strategies like real estate and dividend-paying stocks to generate income.

Set Retirement Goals

In retirement, you’ll need enough money to cover your expenses and allow you to enjoy a comfortable lifestyle. A simple calculation will help you determine how much you need. Generally, you’ll want to have saved at least 80% of your pre-retirement income.

To make this work, you need to create a budget and track your savings. Using an online tool like Mint is an easy way to track your spending and identify areas where you may be able to save.

When creating your budget, start by breaking down your expenses into needs, wants and goals. Many people have trouble with their discretionary expenses, so it’s often best to focus on reducing these first. For example, if you are currently spending $300 per month on entertainment, try cutting back to $250.

You may also need to consider new costs that you’ll have in retirement, such as long-term care and healthcare. Having a solid emergency fund is another important part of your retirement plan. Financial professionals recommend setting aside three to six months worth of living expenses.

Create a Budget

Whether through a work bonus, a side-gig income or yearly raises, being strategic with windfalls and dedicating additional income can help you build up your savings as you enter your 30s. Aim to save upward of $500 or more each month.

Building an emergency fund is another key to financial stability. Aim for at least a year of expenses, ideally in an easily accessible high-interest savings account.

If you’re struggling to balance your desire to live life now with your long-term goals, talk to a financial professional. They can offer advice, including helping you set up a savings plan that works with your budget and suggesting investments that may align with your retirement savings goals.

Investing allows you to take on more risk in the hopes of earning higher returns, which can make a big difference over time. But if you’re just starting out, don’t be discouraged if you don’t earn the best possible returns. Getting into the habit of saving is more important than the specific investment vehicles you choose.

Build an Emergency Fund

Whether you’re a young professional whose laptop dies or a retiree who incurs a large unexpected expense, an emergency fund can provide a financial cushion to help prevent you from relying on credit cards, loans or depleting retirement savings. The general rule is to have an amount saved that can cover three to six months of expenses.

Aim to set aside a small portion of each paycheck into an emergency savings account and consider how you can cut back on discretionary spending, such as dining out or unnecessary subscription services, to boost your emergency funds. Also, try to make the most of windfalls like tax refunds or work bonuses by funneling them into your emergency savings instead of blowing them on short-term gratification.

If you’re still working or have debt, this is a good time to focus on paying off high-interest credit cards and loans and reduce your monthly payments as much as possible. You may also want to start tracking your spending using budgeting apps like Mint or YNAB, which can help you analyze your habits and identify areas where you can save.

Invest

The earlier you start investing, the more time compounding has to work for you. That’s why it’s important for young professionals to invest in a 401(k), Roth IRA, or index funds as soon as possible.

You can also consider taking advantage of a Health Savings Account (HSA), which lets you save pre-tax dollars to cover medical expenses. HSAs also provide tax benefits when you use the money for retirement purposes.

A financial professional can help you understand your options for a variety of retirement savings vehicles, including traditional and Roth IRAs and 401(k) plans. For example, if you’re not sure what your tax rate will be in retirement, it might be worth prioritizing saving in a traditional IRA instead of your company’s 401(k) so that you have both taxable and tax-free withdrawal options.

A well-diversified portfolio is essential to boost your Roth IRA’s earnings potential. Stocks offer high return potential, while bonds can provide stability in market downturns. A financial advisor can help you determine the appropriate asset allocation for your risk tolerance and investment timeline.