Here’s Why You Should Start Saving in Your 20s

As someone who is in their 20s, I know how hard it can be to start saving for retirement. Between paying medical bills, groceries and rent in New York City, my budget usually involves making trade-offs, whether it means opting to travel to a cheaper grocery store or not going out for dinner or drinks with friends.

Of course, I’m not alone in feeling this way. The Deloitte Global 2022 Gen Z & Millennial Survey looked at more than 23,000 millennials and Gen Zers internationally and found that nearly half of them were living paycheck to paycheck; cost of living was also rated as one of their top concerns.

Between high inflation rates — 8.5% in July! — student loan debt and the rising cost of rent and medical expenses, it’s no surprise younger generations are feeling like they’re falling behind previous generations when it comes to saving up for retirement.

There’s data to back this up, too. A 2021 study conducted by the Center for Retirement Research at Boston College found that 28- to 38-year-olds had built up less wealth than previous generations had by the same age, largely because of higher student loan debt.

So, what can Gen Zers and millennials do when it feels like the cards are stacked against them? Select spoke with Barbara Ginty, certified financial planner and host of the Future Rich Podcast, about the importance of saving for retirement in your 20s, even when a lot of factors may be out of your control.

Generally, personal finance advice is best suited for those who have some income left over every month after paying for essential expenses such as housing, transportation, food and medical bills. If the majority of your income goes toward these categories, it can be difficult to cut back, though that could also mean finding cheaper housing, getting roommates or moving back home for a while. Spending less money could also mean cutting discretionary expenses such as dining out, going to the movies or using multiple streaming or subscription services. 

The other option you have is to find a way to bring in more money. You could try getting another job with higher pay, starting a side hustle or asking for a raise at your current job, Ginty explains — with today’s tight labor market, securing a new job with higher pay might not be as hard as it used to be.

As of July 2022, those who have changed jobs increased their wages by 6.7% compared with the 4.9% increase those who stayed in their current roles for the past three months saw, according to the Federal Reserve Bank of Atlanta.

Ginty explains that the primary factor young people have going for them when it comes to saving for retirement is time. When you invest, you’re earning compound interest — or, interest on your interest — so you’ll earn substantially more on your investments over longer periods of time than you would over shorter time frames.

She uses the following example to highlight the advantages of investing early: If you invest $2,000 a year (which is just $166 a month) from age 19 to 27 and don’t save anything again beyond that point, and assume your investments yield an average 10% rate of return over the course of your lifetime, you’ll end up with $1 million by the time you’re 65.

On the other hand, if you wait until age 27 to start saving $2,000 a year and then save for the next 38 years, you’ll end up with $800,000 by age 65. In other words, you would make $200,000 more by the time you’re 65 if you started investing at age 19 and would have only had to save for eight years total, versus starting at age 27 and saving for 38 years straight.

Millennials and Gen Zers aren’t just disadvantaged when it comes to saving for retirement because of student loan debt and increased cost of living. While previous generations may have received retirement benefits through pensions, beginning in the 1970s, an increasing number of employers started offering 401(k) accounts to their employees instead. As a result, the onus of saving for retirement falls on individuals. 401(k) accounts enable people to invest their retirement savings in the stock market, so your returns will ebb and flow along with the market.

Many employers offer a 401(k) match, and the company you work for will match a percentage of income you’re saving. Since 401(k) contributions are typically deducted straight from your paycheck, it’s easier to save this way because you won’t have an opportunity to spend that money before it hits your bank account.

If your employer does offer a match, it’s important to maximize it as you’ll be receiving a 100% rate of return by doing so. Once you’ve received your employer’s match, opt for saving in a Roth IRA, which is another tax-advantaged retirement account.

With a Roth IRA, you’ll pay taxes on your upfront contributions, allowing your savings to grow tax-free over time, plus you won’t pay taxes when you withdraw in retirement. Note that in order to be eligible for a Roth IRA, you must make less than $144,000 as an individual or $204,000 as a married couple. 

Select ranked Charles Schwab, Fidelity Investments and Betterment as the companies offering the best Roth IRAs based on factors such as investment options, fees and ease of use. 

To make the process less intimidating, start small when saving for retirement and slowly increase your savings rate over time. For instance, you could save 5% of your income now but increase that rate to 10% over the next two years. Regardless of how much money you start with, any amount is better than none.

The prospect of saving for retirement may seem daunting when you’ve started your first job or moved into a new apartment, and with rising housing costs and increasing student loan debt, there are many factors making it harder for Gen Zers and millennials to do so.

That, however, is exactly why it’s so important for young people to start saving right now. With time on your side, young people can take advantage of compound interest by investing in tax-advantaged retirement accounts such as 401(k)s and IRAs. Even if you’re only contributing a few hundred dollars a month for now, the difference in earnings could end up being thousands — or hundreds of thousands — of dollars later in life.

Catch up on Select’s in-depth coverage of personal finance, tech and tools, wellness and more, and follow us on Facebook, Instagram and Twitter to stay up to date.