Saving for retirement may not be at the top of your list of priorities in your 20s. After all, you have other financial goals to focus on, like paying off student loans or building up an emergency fund. But if you want to retire comfortably later in life, says William Schantz of Mid Atlantic Financial LLC, it’s important to start saving for retirement as early as possible.
5 Tips to Start Saving for Your Retirement in Your 20s
Open a TFSA or RRSP
If you’re not sure where to start, open a Tax-Free Savings Account (TFSA). A TFSA is used to save money for short-term and long-term goals. The money you contribute to a TFSA is not taxed, and you can withdraw the money at any time without paying taxes on it.
If you have a workplace pension plan, you may also want to open a Registered Retirement Savings Plan (RRSP). With an RRSP, you can deduct the amount you contribute from your income taxes. The money in your RRSP grows tax-free until you retire, when you will start withdrawing it.
Once you have opened a TFSA or RRSP, you need to contribute to it on a regular basis. If you can, try to contribute the maximum amount each year. For 2019, the maximum contribution for a TFSA is $6,000, and the maximum contribution for an RRSP is $26,500.
Ask Yourself Firm Questions about Retirement
If you are serious about saving for retirement, it’s important to ask yourself some reality-check questions. For example, how much money do you want to have saved by the time you retire? What kind of lifestyle do you want in retirement? At what age do you want to retire? Do you have different sources of income or assets that will help you achieve your goal? Answering these questions and more will help you figure out how much you need to save each month.
Match the Employer Contribution Plan
If you are lucky enough to have an employer that offers a retirement savings plan, William Schantz recommends contributing at least enough to receive the full employer match. For example, if your employer matches 50% of your contributions up to 6% of your salary, you should contribute 6% of your salary to get the full employer match. There may be a limit to it, but it is an excellent opportunity to get immediate ROIs.
Start Saving Early and Often
The sooner you start saving for retirement, the better. If you start saving in your 20s, you’ll have a longer time horizon to take advantage of compound interest. Compound interest is when you earn interest on your principal investment plus any previous interest earnings. Over time, compound interest can help your money grow exponentially.
For example, let’s say you start saving $200 per month in a TFSA earning 5% interest compounded monthly. After 40 years, you would have nearly $500,000 saved. But if you wait 10 years to start saving, you would only have about $290,000 saved after 30 years.
Increase Your Contributions Every Year
William Schantz recommends increasing your retirement contributions by at least 3% every year. If you can’t afford to increase your contributions by 3%, try to increase them by 1% or 2%. Even a small increase can make a big difference in the long run.
With these tips from William Schantz, you can start saving for retirement in your 20s. Not many people think about retirement in their 20s, which is why you are already making a good start if you are thinking about your long-term goals.