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How to Start Saving for Retirement in Your 20’s

Have you ever looked at your retirement savings and thought, “Am I truly ready to retire? Will my savings be enough to live a comfortable life?” If you feel that way, you’re not alone. In fact, a staggering 70% of Americans feel like they are not on the right track for retirement and need help saving for it.

But, no one wants to keep working until they drop or try to live off of social security alone. Luckily, the best time to start saving for retirement is in your 20’s and 30’s. By taking advantage of certain tips and tricks during this period of your life, you can set yourself up for a great retirement in your golden years.

How much do you need to retire?

But how can you plan for retirement when you don’t even know how much you need to save? Withough setting a realistic target, you could be left wandering like a hiker without a map.

A quick search on the internet will show you many articles telling you that you need a million dollars to retire, but really it depends on your income and your lifestyle. To determine this amount, you need to budget and understand your current financial situation to identify your future obligations and envision where you want to be in the future.

In your twenties and thirties it’s easy to forget about things like medical costs or setting aside money for your kids. But, these are significant expenses that you need to account for when saving for your retirement.

Which is why you need to ask yourself if you should be saving for things like a long-term health insurance plan, or opening a custodial account for your kids. It’s really important to get good insurance; you might hate paying for it now, but you definitely won’t regret it in case of an emergency.

There are some common rules in retirement that could help you determine the amount of money that you need, such as multiplying your annual spending by 25 or your annual income by 10. For example, if your annual expenses are around $50,000, then you’d need $1.25 million saved up to retire comfortably, or by using the second rule, if your annual income is $150,000, then you’d need $1.5 million saved up to retire.

Of course, there are no set rules since economic conditions change over the years and the money you have saved up could be affected by that, so you’d need to be a bit more flexible with the goal you set. To make things simpler, you can use a retirement calculator that helps you calculate the amount of money you’ll need, based on factors like your current age and income as well as the age you want to retire at.

When do you start saving?

After finding out the amount of money you need to safely retire, you should start saving as soon as you can. To start saving for retirement, you should be spending less than what you earn and have all your high interest debt, which is anything above 7%, paid off. This is because paying off big obligations can lift a huge weight off your shoulders, and you can actually start saving comfortably and dedicate a big portion of your income to it.

If you start saving in your 20s, the common rule is contributing 15% to 20% of your paycheck, and this will likely help you meet your retirement savings goal. If you can’t afford a 15% contribution right away, then you should just contribute as much as you can and work your way up, as long as you realize that the earlier you start, the better.

Saving for retirement tips

Now that you have an idea of the basics, let’s get into the saving for retirement tips that will help you get the most of your retirement savings.

401(k) Matching

The first tip is; take advantage of the free money your employer offers in a retirement plan. Some employers offer 401(k) retirement plans and match your contributions to them. For example, if you contribute $200 each month to your 401(k) and your employer matches it, you’d have $400 in your retirement plan each month. It’s basically free money from your employer.

But, your employer might not match the full amount and contribute at a percentage, meaning that if you contribute $200, they might contribute $100 or $50. If this is the case for you, then you might find it a good idea to open other retirement accounts in addition to your 401(k), like a Roth IRA or a traditional IRA.

You can also make this process easier by automating your savings. You can set up an automatic transfer from your paycheck or checking account to a retirement account, in order to ensure that you actually make the payments each month.

Three Bucket Pension

When you separate your retirement savings over multiple accounts, you could follow a retirement strategy called the three bucket pension. With the bucket approach, you divide your retirement assets into separate buckets of assets based on periods of time. Of course, those time periods can be flexible as can be the number of buckets.

For example, you might want your first bucket to be a retirement account that has savings that would support you for five years after your retirement. After this runs out, you can use the savings in the second bucket, which would support you for up to 10 years, and finally, you could move towards your last bucket for the rest of your retirement.

One approach is filling your first bucket with short-term, low-risk liquid holdings of cash equivalents and cash, so you can cover your expenses without tapping into your stocks and other investments. Then, your second bucket could include a mix of bonds and equities, and the third bucket could be focused on growth stocks because it has the longest time horizon.

This strategy is helpful because it adds a psychological aspect to saving for retirement, as you could become more confident when you know that you have certain assets and income sources set aside in different accounts for your anticipated future expenses.

Target-date Funds

After setting up your retirement account or accounts, you’ll need to decide what to invest in using them. There’s a general rule which calculates the percentage of stocks you need to have in your retirement account, and it is 120 minus your age. For example, if you’re 20 or younger, your portfolio needs to be 100% stocks, but if you’re 30, your portfolio needs to be 90% stocks, and 10% of a less risky investment like bonds.

Of course, you can always invest in an S&P 500 index fund with a low expense ratio, which is offered by platforms like Schwab (NYSE: SCHW) and Fidelity (NYSE: FNF) at 0.03% or less. But, if you want something that will require less involvement from you, you can invest in a target-date fund.

Target-date funds are funds that are structured to maximize returns by a specific date, which would be your retirement date. Generally, these funds are designed to build gains in the early years by focusing on riskier growth stocks, then they aim to retain those gains by weighting towards safer, more conservative choices as the target date approaches.

Examples of these funds include the Vanguard 2065 fund or the Fidelity Freedom Index 2045 Fund. In general, target-date funds usually mature in 5-year intervals, such as 2035, 2040, and 2045, and their expense ratios could range from 0.08% to 0.62%.

Even though the automation target-date funds offer is considered a great asset, it can also pose some risk, since market conditions could change and in turn make stocks a better investment than bonds, or vice versa.

If you want to counter this problem, then you should invest in a target-date fund that reaches maturity before your retirement date. For example, if you plan on retiring in 2052, but don’t like the risks of market volatility until then, you could buy the 2040 or 2030 fund instead of the 2050 fund.

Another way to do it is by putting, say 70%, in the 2050 fund and the rest in other funds, which would create some sort of ladder that will help you receive your money in phases, and reduce volatility for your whole portfolio while having a one-stop fund at the same time.

Roth IRA Conversion Ladder

Now you know what to invest in and start contributing money to your tax-deferred retirement plans, such as a 401(k) or an IRA, and you’re thinking about how you’ll get to use that money one day when you retire. But, when is that exactly?

It’s common knowledge that you can only withdraw money from your retirement accounts when you’re 59 and a half years old, but what if I told you that there’s a loophole that could help you retire earlier and withdraw money without forcing you to pay a penalty?

This loophole is called a Roth IRA conversion ladder. It works by taking the money you have saved up in a traditional IRA or a 401(k) and moving it to a Roth IRA, which allows your money to grow tax-free forever, unlike the previous two. In addition to that, a Roth IRA allows you to withdraw money tax-free as well.

What you’re ultimately doing by creating a Roth IRA conversion ladder is asking the IRS to tax you on the money you pull out from the 401(k), then put that money in a Roth IRA where it’ll grow tax-free.

By now, you’re probably wondering how this would help, since you’ll end up paying the taxes. Well, the trick is to do this when you’re at a very low taxable income point. For instance, let’s say you’ve retired in 2024 and have 0 income, but you have annual expenses of $50,000. You can create a Roth IRA conversion ladder by pulling out $50,000 from your 401(k), and that $50,000 is taxable, but you’re getting taxed at 0 dollars of income.

This means that you get to take the standard deduction of $14,600, and get taxed on just $35,400 from the original $50,000, and at that income level, you fall into the 12% tax bracket, if you’re filing for taxes as a single person. So, you’d end up paying just $4,016 in taxes on $50,000.

You can even get into the 10% tax bracket and pay less money if you’re filing for taxes with a spouse, so if you want to find out how the new tax brackets work, check out our article on the 2024 tax brackets.

This method is great because it allows you to grow your savings tax-free, and also withdraw the money after only five years after you create your Roth IRA account, so if you retire earlier, you won’t have to wait until you’re 59 to use that money. If you do this conversion process each year and create a ladder, then you can pull out all your money from the Roth account completely tax-free.

Equity Compensation

For our next tip, we suggest that you find a company to work for that offers equity compensation. While cash compensation can be great, having equity in the company you work in, especially if the company has a great future outlook and growth opportunities, can help you make much more money over the long term.

For example, if you receive an equity compensation of 100 stocks worth $1,000, meaning that the share price is $10. If the stock appreciates and the share price becomes $15, then you’d have 100 stocks worth $1,500. On the other hand, if you just took a $1,000 cash compensation, you’d miss out on the extra $500.

This could really help you out when saving for your retirement, since it takes out actual cash from your hands that you might be tempted to splurge on things you don’t need, and puts it in stocks that can appreciate over time.

However, you shouldn’t depend solely on that, since having a lot of equity in one company can be very risky if something happens in the company or industry that could make it lose money and value, which could leave you having to rethink your entire retirement plan.

You should be focused on diversifying your investments, and you don’t even have to spend money to buy stocks to do that. In fact, you can sell some of your equity compensation shares, and use that money to invest in other stocks.

Buffer Assets

As for our final tip, you could get a buffer asset that will help you transition from your employment to retirement, or hedge against the market risks that could harm your investments. This is because buffer assets are very low risk assets whose values don’t change in the same way as the assets in your investment portfolio. They include investments like cash deposits and Premium Bonds.

You can use the buffer assets to cover the first few years of spending when you enter retirement, in order to practice adaptive spending and know if you need to bump up or decrease your annual expenses without having to dip into your portfolio of stocks.

On the other hand, you can use buffer assets by treating them as reserves in your retirement, meaning that you can keep a big pool of money off to the side that you can spend from in the years when your portfolio is down.

This can help you reduce risk, but there’s a tradeoff. Holding buffer assets means that you are holding money back from your investment portfolio. Therefore, you need to decide on the perfect balance between your investment portfolio and your buffer assets.


To sum up, there are many methods you can use to save up for retirement, and we tried to show you some that can help you get the most of your savings.

Of course, these methods can be changed and customized depending on your needs and how much money you can actually contribute to your retirement accounts, but the most important things you need to know is that you should start the contributions as early as possible in order to achieve your retirement goals, as well as the great importance of diversifying your retirement investments because we don’t know what the future holds, so you have to be prepared.


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