Retirement may seem a long way off, but planning now—like right now—is essential for ensuring you’ll have enough money to last through retirement. If you have enough, you might even be able to retire early. Wouldn’t that be nice?
If you were born after 1960, you will not be able to claim your full social security benefits until you are 67 years old. That’s a little bit scary. While plenty of people are still active and working at 67, you might not be. You might not even want to be.
Social security can be a nice financial cushion during retirement, but it should not be your only source of income as you grow older. A robust retirement account can be the difference between retiring when you want and working into your late sixties or seventies. Besides, let’s be honest, social security isn’t going to fund your golf trips.
A recent survey by Northwestern Mutual found that 21% of Americans don’t have anything saved for retirement. For millennials, that number is even higher—two-thirds of millennials don’t have any retirement savings at all.
If you are twenty-something and looking to start on or maximize your retirement savings or retire early altogether, here are the top tips you can put into practice today.
Harness the Power of Compound Interest
When it comes to retirement, a penny saved is not a penny earned— with compound interest, that penny could easily turn into a nickel or even a dime. When you invest in a retirement account, your money gains interest over time. Think of it as a snowball rolling down a hill. It’s going to pick up some extra weight as it goes.
This is largely thanks to compound interest.
Compound interest is the principle through which earned interest accrues interest too. Sound confusing? It is. It’s interest on your interest. It’s interest-ception. What you need to know is that compound interest helps you save more money faster, thereby greatly increasing the amount of money you will amass over time.
Compound interest is the main reason why it pays to start investing in your retirement early. If you plan to retire at 65, starting your retirement fund at 25 gives you 40 years to accumulate compound interest. The difference could amount to thousands of dollars by the time you retire.
Max Out Your Employer’s 401k Contributions
Once you understand how compound interest works, choosing a retirement account that works for you is the next step. You might want a 401k. A 401k is an employer-sponsored retirement plan that enables the employee to take out a portion of their paycheck before taxes and put it into their retirement. Taxes will apply later when you withdraw that money.
A major benefit of a 401k is that you’re less likely to spend money you never see. Having money automatically stashed away for you is almost like never having it at all— until you need it fifty years later. Ever leave a ten dollar bill in your back pocket and miraculously find it three weeks later when you need it the most? It’s a little bit like that.
Many employers offer what is known as a “401k match,” which means that they’ll see what percent of your salary you’re putting into your 401k and match it. Most often, employers will match 3% or 6% of your salary. A 3% match means that if you contribute 3% of a $100,000 salary ($3,000), your company will contribute an additional $3,000 for a total of $6,000 in your account. You can add more or less than 3% of your salary to your account, but your employer will not contribute any more than 3%.
If a 401k doesn’t seem like it’s for you, that’s okay. It isn’t the only option.
If your employer does not offer a 401k match, or if you have already contributed enough of your own salary to max out the employer’s match, you may want to consider an IRA as an additional account or even as a replacement account.
You can also choose from a variety of mutual funds with stocks, bonds, and money market investments. You could even pick a “target-date fund” based on your preferred retirement year, which will put together a portfolio that becomes safer with your money as you reach your target retirement date.
Max Out Your IRA or Roth IRA Contributions
An IRA (Individual Retirement Arrangement) and Roth IRA are two other retirement account options. They have a maximum annual contribution of $5,500. Although these accounts are similar, they IRAs and Roth IRAs have distinct differences with regards to taxes and eligibility.
For a Roth IRA, contributions are not tax-deductible, but withdrawals are tax-free and without penalty. To be eligible for a Roth IRA, your adjusted gross income must be less than $135,000 for single taxpayers or less than $199,000 for married taxpayers.
On the other hand, a traditional IRA is not taxed at the start, but retirement withdrawals are taxed— similar to a 401k. IRA contributions may be tax-deductible if you and your spouse do not have an employer-sponsored plan and if you meet certain income requirements.
It is worth noting that you can have both a 401k account and an IRA or Roth IRA. However, you cannot contribute to both a Roth IRA and a traditional IRA.
Cut Unnecessary Expenses From Your Monthly Budget
So you’ve figured out your target retirement age, set up your preferred retirement account(s), and you’re ready to start saving. But how can you put aside the funds you need to attain your goal? Here are some ways to redirect your expenses and prioritize saving.
Housing rule of thumb: you should aim to spend less than 30% of your income on housing per month— whether you be renting or paying off a mortgage. Ideally, you want to be spending around 25% of your income, or lower if you can cut it. Anything over 30% is you robbing yourself.
If you live in a city or town where this is impossible, there are things you can do. In places with high housing costs, like New York and San Francisco, find a few roommates to cut down on rent.
Food and drink
We live in a dangerously convenient world. Delivery exists. And if the food you’re craving doesn’t typically do delivery, UberEats is one app tap away. How could anyone possibly resist the temptation? Easy. Like this:
Reduce impulse buys at the supermarket by meal planning, and eat at home as often as you can.
Pack a lunch for work rather than buying an overpriced meal during your break. Meal prepping can be really useful here, because you won’t have to wake up early to make something tasty. You can just grab your Tupperware and hit the road.
Brew your coffee at home and save that trip to Starbucks for the occasional pumpkin spice treat.
If you like to go out on the weekends (or the weekdays, whatever, we don’t judge), pre-game first to avoid buying multiple $10 cocktails at some trendy new bar.
Are you in the market for a toilet bowl light? A hammock for only your feet? A jar of ladybugs?
The siren song of Amazon makes it far too easy for you to buy things you don’t need. When the impulse to buy strikes, put the item in your shopping cart. Wait 48 hours. If you still need or really want to buy what’s in your cart, then do it.
Just make sure you note the purchase in your monthly budget.
Take a look at your subscriptions and memberships. Do you need all of them? Subscriptions are usually auto-billed, and it can be easy to forget what you’ve subscribed to. And that’s exactly what they want. Use services like Trim to cut down on unnecessary monthly billing.
If there are some subscriptions you just have to have, that’s okay. There are other ways to cut down.
If you enjoy streaming movies and TV shows, share a Netflix account with a sibling or significant other. Just make sure they’re long-term so that you don’t find yourself in a custody battle over your account.
If you rarely use your expensive gym membership, try exercising at home or take up a hobby, like running or cycling.
Cutting $25 a month from subscriptions gives you an extra $300 per year to put into retirement. Crazy, right? Even crazier, that $25 can amount to $12,000 over 40 years, or more than $35,000 when compound interest (at a conservative 5%) is taken into account.
A few smart saving decisions in your twenties can have a huge effect on your retirement account and quality of life. You can use retirement calculators such as those at Vanguard to get an idea of how much you’ll need to retire and what you are on track to accumulate. With more planning, you might even be able to retire early!
Start saving for your retirement today—your future self will thank you.
Janine Perri is a freelance writer and marketing professional with experience writing about business, marketing, education, travel, and language services.