Make Your Retirement Savings Count in Your 20s and 30s

Starting a retirement savings habit when you’re young gives you the financial flexibility to build long-term wealth.

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by NEA Member Benefits

Key takeaways

  • The longer your money stays invested, the more you benefit from compounding.
  • Saving in a 403(b) plan can lower your current taxes and provide a retirement income cushion.
  • Investing in your 20s and 30s lets you take on more risk so can reach for higher returns.

When you’re in the early stages of your career, there’s a lot of competition for what feels like precious few dollars in the bank. Rent. Student loans. A car. Insurance. Work wardrobes.

Beyond those daily expenses, you also have various short and medium term life goals. Marriage? A family? A home? It’s a lot to reconcile each month especially on a starting educator’s salary.

There’s one long-term goal you really want to add to the planning mix: saving for retirement. Since this could be a decades-long endeavor, starting early gives you a huge advantage. Yes, planning for immediate goals may be a lot more fun. But the far-off nature of retirement is the biggest advantage for a young saver. Here are four things to consider as you establish lifetime savings habits in your twenties and thirties. 

1. Start early, start small

With saving and investing, time is money. The longer your money stays invested, the more you can benefit from compounding—earning interest on the money you save and on the interest that money earns. Compounding over 30-40 years can turn small sums into much larger sums. For example, if you invested just $100 a month—about the cost of a large pizza, a salad and a drink per week—starting at age 25, and got an average 6% annual return, you’d end up with over $275,000 by age 65.*

Even if you can only afford to put aside a few dollars, it’s important to establish a savings habit. You can always increase your savings as your salary rises. Consistency is more important than quantity early on.

2. Pay yourself first

As an educator, you’ll be paying into your state pension system. But the long-term security of state pensions is tenuous. To give yourself extra retirement income security, consider saving in a supplemental 403(b) plan. Pretax contributions to a 403(b) help to lower your current income taxes and the money grows tax-deferred until withdrawal. Since contributions are automatically deducted from your pay, you get built-in savings discipline.

Another option is a Roth IRA. You fund a Roth account with money that’s already been taxed, but you can take tax-free qualified withdrawals in retirement. If you accumulate some wealth through prudent saving and investing, you might be in a higher tax bracket when you retire than you are now. In that case, tax-free income would look very enticing. You can set up automatic contributions from your checking account into your Roth account.

3. Invest for long-term growth potential

The stock and bond markets have their ups and downs. But over decades, historical average returns have been positive. However, stocks have provided much higher returns than bonds. Between 1980 and 2016, stocks, as measured by the S&P 500 Index, had an annualized return of 11.54%. During the same period, the annualized return of bonds, as measured by the Bloomberg Barclays U.S. Aggregate Bond Index, was 7.79%.

The difference in potential account growth between these two returns over 30 years is substantial. Investing $200 a month at 7.79% would grow to $285,676 over 30 years. But investing the same $200 a month at the average stock return of 11.54% would grow to more than $631,387— more than twice as much. Of course, stock prices often go up and down more severely than bond prices, so you have to be willing to take on more short-term risk to be a stock investor.

With a long time horizon, you want to invest for the highest potential returns without taking on so much risk that you lose sleep at night. That probably means putting a large percentage of your savings in stocks. This aggressive strategy may give you a better chance of building more wealth. To help you understand more about the risk and return relationship, learn some investing basics.

4. Spend wisely and avoid debt

The most common excuse for not saving is, “I can’t afford to save.” Given the advantages of saving over a very long time period, it can be argued that you can’t afford NOT to save early on in your career. Most people can find some extra cash by being smart with their spending. Set up a household budget and stick to it. Limit your debt because interest payments on loans and credit cards can eat up any extra cash that you otherwise could contribute to your retirement plan. Reset your priorities to include your long-term future security alongside your desire to enjoy life right now. If you plan carefully and make smart decisions, you can have both.

Establishing a consistent savings habit early in your life will allow you to save less each month and still reach your long term goals, thanks to the power of compounding over time. You have one chance to get an early start. Rev up your retirement savings habit as soon as possible and then keep the pedal down for a lifetime of wealth building potential.

*Savings projection is for illustrative purposes only. Your results may be higher or lower. Assumes all earnings reinvested in a tax-deferred retirement account. Taxes would be due on withdrawal.

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