In your 20s, the best thing you can do is start saving.
Start putting money toward retirement today, because you are much less likely than your parents or grandparents to have a company pension that you can rely on in retirement.
When you start saving now, your money has a chance to grow. Small amounts you save each month can grow into much larger amounts later, especially 30 or even 40 years from now.
When you start to save, think about:
- How much to contribute regularly
- Where to put your money (types of retirement savings accounts)
- How to invest your contributions
1. How much to contribute regularly
2. Where to put your money
After choosing a monthly amount to save, it’s time to decide where to put it.
First, think about taking advantage of your employer-sponsored plan like a 401(k), 403(b), or 457, if any of these are offered.
- Often, employers offer some level of matching contributions to what you’re saving. This can provide a valuable boost to your savings.
- Make it automatic. Your contributions are automatically deducted from your paycheck, allowing you to be disciplined about saving.
- Lower your taxable income. Typically, contributions are taken from your paycheck before taxes—so you pay less in taxes by deferring them until you withdraw the money in retirement.
- These plans allow for tax-deferred earnings growth. This means you don’t pay current taxes on any dividends and interest earned until the funds are withdrawn, typically in retirement. This can also help your overall savings to grow faster than a comparable, taxable savings or investment account.
If you don’t have access to a plan at work or would like to contribute something in addition to your employer’s plan, an Individual Retirement Account (IRA) is another great option. The advantages are:
- Contributions to a Traditional IRA may be tax-deductible: You may pay less in taxes this year – provided you meet the income eligibility requirements.
- Growth in a Traditional IRA is tax-deferred: You don’t have to pay taxes on this growth until you withdraw it.
- Alternatively, if you meet eligibility requirements, you have the option of a Roth IRA. Contributions are made on an after-tax basis, but earnings grow tax free and remain tax free when you withdraw them in retirement.
Wells Fargo offers a range of IRAs, including Traditional and Roth IRAs, as well as IRAs for small business owners and self-employed individuals. Visit the Wells Fargo IRA Center to learn more.
3. How to invest your contributions
The two basic considerations when making investment decisions are:
- Your desired reward
- Your tolerance for risk.
Diversification and asset allocation
A savings account doesn’t earn much interest, but also carries little risk. A share of stock in a company has the potential to earn a significantly higher return than a savings account. However, it carries far more risk. How much you hope to make on what you’re investing is the reward. The more you hope to make, the greater the risk you’ll likely need to take. Deciding how and where to invest your money requires an understanding of the trade-off between risk and reward.
In your 20s, it’s important that your approach is not too conservative. Many people make the mistake of being too conservative with their savings when they don’t need the money for 30 or 40 years. When you’re just starting to save, the biggest risk you have is not earning enough to outpace inflation.
Diversification means limiting your risk exposure to any one specific investment or group of investments. Investing in one stock is far more risky than investing in a large number of stocks. But investing in a large number of individual stocks can be time consuming and expensive. Thankfully, you have choices, like mutual funds. A mutual fund pools money from investors to purchase stocks, bonds, or other securities for its portfolio. As a result, each investor owns a portion of a portfolio that includes many more stocks and bonds than they could afford to purchase individually.
Asset allocation refers to how you choose to invest among asset classes like stocks, bonds, mutual funds, and cash.
Read more about diversification and allocation.
Remember to make it automatic
Dollars that you otherwise might spend elsewhere will be deposited straight into your retirement savings.
- Set up a monthly automatic transfer from your paycheck to your retirement plan at work.
- Set up a monthly automatic transfer from your checking account to an IRA at Wells Fargo.
Start saving now
Put time on your side. The smartest step you can take is to begin saving as soon as possible.
We're here to help you shape your retirement savings plan. For more tips and ideas, see the retirement checklist for your 20s.
To get started, contact a Wells Fargo Retirement Professional today