Top Retirement Savings Tips for the 25-to-34-Year-Old

Top Retirement Savings Tips for the 25-to-34-Year-Old

Retirement plan Offered by
401(k) Plan Private sector companies
403(b) Tax-Sheltered Annuity Plan Public schools, churches, and 501(c)(3) charitable organizations
457(b) Deferred Compensation Plan State and local governments, tax-exempt 501 entities

These plans have many similarities, despite being offered by different types of employers. For example, they both offer traditional or Roth contributions, which differ when it comes to their tax advantages.

  • Traditional: Contributions are withdrawn before tax, reducing your taxable income for the current year. Money grows tax-deferred in your account, and withdrawals are subject to ordinary income tax.
  • Roth: Contributions are made using income that has already been taxed. Money grows tax-free in your account and can be withdrawn tax-free during retirement.

These employer-sponsored retirement plans are also similar in their contribution limits. For all three accounts, you can contribute up to $22,500 per year for 2023. The limit increases to $23,000 for 2024. All three plans also allow your employer to make contributions on your behalf.

Individual retirement accounts

An individual retirement account (IRA) is a type of account that you open yourself through a brokerage firm instead of through an employer. As with a 401(k) or other employer-sponsored plan, you can choose between traditional or Roth contributions. In 2023, you can only contribute $6,500. The limit increases to $7,000 in 2024.

It’s also worth noting that there are some restrictions on IRAs that don’t exist for employer-sponsored retirement plans. If your income is too high, you may be prohibited from deducting your traditional IRA contributions or from contributing to a Roth IRA.

Self-employed retirement plans

There are several types of retirement plans specifically designed for self-employed individuals and/or small business owners. You can use these accounts if you have your own business, even if you also have a full-time job with access to a retirement account.

  • SEP IRA: A Simplified Employee Pension (SEP) IRA allows business owners to contribute up to 25% of their salary to a pre-tax retirement account. However, if you are contributing to your own account and have employees, you must also contribute the same percentage to their plans.
  • 401(k) only: Officially known as a participating 401(k), this plan works just like any other 401(k). You can only use it if you have no employees besides you or your spouse, but can contribute up to $66,000 in 2023 ($22,500 as your elective employee deferral and up to 25% of your pay as your employer’s contribution). In 2024, the limits will increase to $69,000 and $23,000, respectively.

2. Take advantage of Employer-Sponsored Retirement Accounts

There are many factors that make employer-sponsored retirement accounts an attractive option for retirement savings.

First, employer-sponsored retirement accounts have higher contribution limits than an IRA you might open on your own. In 2024, you can contribute up to $23,000 to your 401(k) but only $7,000 to your IRA. These higher limits will help you reach your retirement goals more quickly. Contributing up to the maximum can be part of a plan to help you achieve early retirement or a more luxurious retirement lifestyle.

Another common benefit of employer-sponsored accounts is that they can have matching contributions from your employer. Many companies will match employee contributions up to a percentage of their salary. For example, a company may match your 401(k) contributions at a rate of 50% to 6% of your salary or at a rate of 100% to 3% of your salary.

“If your employer offers a 401(k) match, take it — otherwise you’re leaving free money on the table,” Steve Sexton, CEO of Sexton Advisory Group in Temecula, Calif., told Investopedia. “Your employer match can give you a leg up on your retirement savings plan and get you closer to your financial goals faster.”

NOTES

Some companies also offer matching contributions. In other words, your employer may contribute a percentage of your salary to your 401(k) or similar plan, regardless of whether you have contributed.

3. Automate Your Retirement Contributions

Automating your retirement contributions is the simplest way to ensure you meet your investment goals each month. Automation has some distinct benefits.

First, automating your retirement contributions ensures that your contributions happen regularly. It’s easy to put off contributing and use the money for other purposes if you don’t automate your savings. Once your contributions are automated, no action is required on your part. “It allows you to ‘set it and forget it,’ reducing the number of tasks around your financial responsibilities each month,” says Sexton.

Automation also makes it easier to plan your annual contributions in advance. Let’s say you know you want to max out your 401(k) contributions for the year. You can set up automatic contributions of $1917 per month and you know that at the end of the year, you will contribute a maximum of $23,000.

4. Create an Emergency Fund

Having a good emergency fund can directly affect your ability to achieve your retirement goals.

“It’s important to realize that unexpected expenses will happen throughout your life, including retirement,” Sexton said.

First, your emergency fund can help you avoid disruptions to your finances that could derail your retirement savings efforts. You can use your emergency fund to cover unexpected expenses like medical bills or car repairs instead of transferring money that should have gone into your retirement account.

An emergency fund can also help you avoid withdrawing money from your retirement account, either as an early withdrawal or a loan. Withdrawals and retirement loans have certain financial consequences, including taxes, penalties, and/or interest. And, of course, money that isn’t invested doesn’t grow.

“It’s just not possible [an emergency fund] reduce the financial blow of an unexpected life event – ​​such as a medical diagnosis or an accident – ​​it also prevents you from accumulating debt in your golden years,” Sexton said.

Many financial experts recommend setting aside between three and six months worth of expenses. Sexton recommends checking it twice a year to make sure it’s updated for lifestyle changes and inflation.

5. Use the Power of Compounding

Investing early and often is about the amount of money you can put into your retirement account and how much money you will get back. If you start saving for retirement early, you can take advantage of the power of compounding. Compounding is when the money you invest earns money, and then the money you earn starts earning money as well.

Here’s an example of how compounding works:

Let’s say you contribute $500 a month starting at age 25 until you retire at age 65. If you put that money in an interest-free bank account, you’ll save $240,000 over your 40 years. storage. But what if you invested that money?

Let’s say you put the same $500 each month into a retirement account that earns an average annual return of 8%. At the end of 40 years, you should have accumulated over $1.5 million.

You can benefit from compounding at any time in your working life, but starting to save in your 20s and 30s gives you an advantage over saving later, because your money has more time to grow and compound. than if you wait until your 40s or 50s to start investing.

Is It Better to Start Saving for Retirement at 25 or 35?

The earlier you can start saving for retirement, the better. If you can set aside money at age 25, you can use the power of compounding for an additional 10 years compared to if you started saving at age 35.

Is 35 Too Late to Start a Roth IRA?

You can open a Roth IRA when you’re 35 and start contributing to it. It’s not too late to start a Roth IRA at 35. Your contributions are made with after-tax dollars and then you can withdraw your money, including any earnings you’ve made, in your retirement year.

How Much Should a 25-Year-Old Have in Retirement?

How much you can save for retirement at any age depends on your financial goals and current financial situation. Some experts recommend setting aside at least 15% of your income each year.

The Bottom Line

If you’re a 25- to 34-year-old saving for retirement, you’re off to a good start building your nest egg. Now that you’ve taken the important step of saving, you can use some strategies like automating your investments, creating an emergency fund, and taking advantage of your employee benefits to stay on track to achieve ot your retirement goals.

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