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What You Need To Know About Saving For Retirement in Your 20s

This post is sponsored by Lexington Law.   

title photo with girl putting money into piggy bank in background

When was the last time you thought about retirement? Um… is never a valid answer?

If that’s you, you’re not alone. Many millennials haven’t saved anything towards retirement (yet). 

Why You Need To Be Saving For Retirement In Your 20s

Did you know that 43% of millennials (age 25-34) lack any kind of retirement savings? Those in their 30s have around $13,000 in their retirement accounts. And for forty-somethings, that number is around $31,000. Financial experts typically recommend having approximately $1 million in retirement savings by age 65. According to Schwab’s 2019 401(k) Participant Survey, Americans believe that they need around $1.7 million to retire At this rate, it feels like many of us will never get there.


The longer you wait to save for retirement, the longer you’ll have to wait to afford to retire. Some other reasons to save for retirement in your twenties include:

  1. Saving more now means saving less later.
  2. The sooner your save, the sooner you can retire.
  3. A matched contribution is essentially free money and…
  4. … the earlier you start, the longer compound interest can work for you.
  5. Searching for a retirement community is made easier when you save for your future. This way, you can afford to pay for it without having to worry about straining your finances or relying on your family for help.
  6. More money saved = more financial freedom.

Why Your Credit Score Matters When It Comes To Saving For Retirement

Credit plays a huge role in our lives. From interest rates to employment, good credit is a building block for financial freedom.

A low or poor credit score can cost you thousands of dollars over the course of your lifetime. But, don’t worry, there are simple ways to improve your credit. These range from using a secured credit card to improve your credit score to work with a credit repair consultant, which we discuss below.

For those of us who need a visual, here’s an example by the numbers:

Mildly Damaged9.7%$422$4,740

Even just looking at that example, that’s a lot of money over the course of five years that you could be putting towards something else, like saving for retirement. When you improve your credit score you’re giving your future self a gift of reduced payments because you’ll be able to save money by qualifying for lower interest rates.

Related: How To Start Improving Your Credit Score In The Next 6 Months

If you’re not happy with where your credit score is right now or have questions about potentially unfair negative items on your credit report, I highly recommend reaching out to the credit repair consultants at Lexington Law. 

They’ll be able to discuss with you establishing a game plan, advocate on your behalf to dispute unfair negative items, and work with you to help improve your credit. Click here to call now.

girl putting money into a pineapple shaped piggy bank

How To Figure Out How Much You Need For Retirement

While you should be saving for retirement, it can be hard to picture that without knowing exactly what you’ll need or what you expect from retirement.

Essentially you’ll need enough money to support yourself through the end of your life once you stop bringing in income. The way to do this is through saving and investing. There are several options you have (more on this below) but it’s important to keep in mind how the money will grow (thanks compound interest) and when you’ll need to access it. 

Here’s a non-exhaustive list example from Lexington Law for what to consider for your retirement expenses:

  • Current household income, both before and after taxes
  • Age you plan to retire
  • Goals for retirement, such as where you want to live and your desired lifestyle
  • Current and future budget

Then, create an estimated budget for retirement that represents 80 to 100% of your current income. For example, if you bring home $5,000 a month, make a retirement budget of $4,000 to $5,000 a month. Be as detailed and realistic as possible.

Then you’ll want to plug the numbers into a retirement calculator to give you a savings goal to reach for. Now, we’ll move onto the types of accounts that will help you reach those goals.

Related: The Ultimate Financial Checklist For Your 20s

photo of calculator and money

Types of Retirement Accounts 

1. Individual Retirement Account (IRA) 

An individual retirement account or IRA is a tax-advantage account that is available to everyone without access through your employer. The money that goes into this account comes from your pre-tax income. This is referred to as a traditional or standard IRA. 

There are three further types of IRAs: Simple, Roth, and SEP. 

  1. A Simple IRA needs a matching contribution from your employer and is taxed like a traditional IRA. You contribute funds from your pre-tax income and you’ll be taxed when you withdraw the money from the account in retirement. Both simple and traditional IRAs have penalties for withdrawing funds early.
  2. A Roth IRA is funded with after-tax income. It’s money you contribute after you pay your taxes (so the paycheck that appears in your back account). With this type of IRA, withdrawals are tax-free (because you’ve already paid the taxes). There are no penalties for early withdrawal. There are income contribution limits and thresholds, so make sure to check what the most up-to-date figures are with the IRS before opening an account.
  3. There is also an option for Simplified Employee Pension (SEP IRA). It’s like a Simple IRA but doesn’t need a matching employer contribution, however, ones that do offer matching have to offer the same percentage for each employee at the company. One benefit is that contributions from the employer and by self-employed people are tax deductible. 

2. 401K

A 401(k) is most frequently offered through your employer. These are called employer-sponsored 401(k) plans and are where many people start with their retirement savings. Money that goes into your 401(l) comes from your pre-tax income. So you aren’t taxed on that money until you withdrawal it (you’re required to start taking contributions at age 70.5) and then it’s taxed like regular income.

Many employers offering a matching contribution up to a certain amount. This varies per employer but if your company offers matching, at the very least you’ll want to contribute up to that amount. Otherwise you’re missing out on free money!

There are contribution limits so be sure to check with the IRS each year to make sure you aren’t exceeding them for your age and income.

3. Other options:

There may also be other options available to you depending on your type of workplace and income. Examples of these that you might see or hear mentioned include: 

  • 457 Plan
  • SARSEP Plan
  • Payroll Deduction IRA
  • Profit-Sharing Plan
  • Defined Benefit Plan
  • Money Purchase Plan
  • Employee Stock Ownership Plan
  • Governmental Plans
  • 409A Non-qualified Deferred Compensation Plan
  • Pension

These might be in additional to an IRA or 401(k) or replace them, depending on your unique situation. 

photo of calculator, money, and crystals

The Money Growth Mindset

It can be hard to let your money sit and grow for a future that you can’t yet imagine. Especially when there are bills that need to be paid now. And especially when you have student loan or consumer debt that desperately needs to be paid off. Retirement and the future, often falls to the wayside. It’s hard to envision and even harder to prioritize.

 Let’s look at some examples. This blog post from Mass Mutual outlines three different retirement-saver scenarios using an online retirement calculator:

Saver 1: Age 22
Goal retirement age: 65
Years to accumulate retirement savings: 43
Monthly savings: $500
Average annual investment return: 8 percent
Total savings by age 65: $2,255,844 before taxes and inflation

Saver 2: Age 32
Goal retirement age: 65
Years to accumulate retirement savings: 33
Monthly savings: $500
Average annual investment return: 8 percent
Total savings by age 65: $972,542 before taxes and inflation

Saver 3: Age 42
Goal retirement age: 65
Years to accumulate retirement savings: 23
Monthly savings: $500
Average annual investment return: 8 percent
Total savings by age 65: $395,866 before taxes and inflation

As you can see, the saver who started at age 22 is in a much better place when it comes to retirement than those who started at 32 or 42. 

If you’re over 22, don’t let this get the best of you! Do not throw in the towel. “Oh well” should not even be an option. Start doing something today to improve your retirement savings (some ideas are below).

Your money needs time to grow, and the more time you can give it, the better. And every dollar counts.  

What to do to save more money for retirement starting today:

1. Get your match.

If your employer offers matching, make sure you are contributing at the very least what they match to. 

2. Up your savings rate by 1%.

Whatever you’re putting into your retirement accounts now? Increase it by a percentage point. 

3. Max out your current account.

Where you have a 401(k) or IRA, make sure you’re on track to max that account out at current contribution limits according to the IRS.

4. Set up a plan to make additional income.

I wrote an entire guide on how to make more money. Use that income to step up your retirement savings!

5. Refinance a loan.

If you have student loans, research providers to explore refinancing options to free up money to put towards retirement. Here’s what Lexington Law suggests: 

If the interest rates on one or more of your existing student loans are on the high end, look into refinancing. If you have multiple loans, you may be able to consolidate them into a single new loan with a lower interest rate and monthly payment. Just be sure that if you are rolling a federal loan into a refinanced private loan, that you are not giving up some of the perks of those loans, such as deferment options. Of course, if your goal is to get rid of your student loan debt faster, deferment may be an easy sacrifice to make for a lower interest rate and payment.

6. Research a new retirement account.

What accounts do you have open now? Doing research on the ones I discussed above, make a plan for which account makes the most sense for you to open next. 

7. Negotiate a fixed expense.

Make a list of the bills you’re paying right now. Look up the competitor companies in your area and get a quote for the same service you have now. Call up one of the providers and ask for a discount or a reduced plan, mention the competitor if necessary. Now that you have a lower bill, put the money you’re saving towards retirement. Check. 

8. Calculate what you need for retirement.

Using the steps in the first part of this post, calculate the number you’ll need in savings when you retire. Then use the linked calculator to work backwards to figure out how much you should be saving monthly.

photo of computer with hat and money

The truth is that retirement isn’t as far away as it seems. Doesn’t it feel like just yesterday you were walking into high school as a freshman? Then in the blink of an eye you were graduating college. Maybe you’re married now or are expecting your first child soon. Life moves quickly and we’re all aging whether we like it or not. It’s time to get prepared.

Let me know what you’re currently doing to save towards retirement and what the next step you’re planning to take is! I’m off to research the next account I’m going to open to meet my savings goals. Join me? 

About the Author

Nicole Booz

Nicole Booz is the founder and Editor-in-Chief of GenTwenty, GenThirty, and The Capsule Collab. She has a Bachelor of Science in Psychology and is the author of The Kidult Handbook (Simon & Schuster May 2018). She currently lives in Pennsylvania with her husband and two sons. When she’s not reading or writing, she’s probably hiking, eating brunch, or planning her next great adventure.