How to Invest for Retirement In Your 20s, 30s and 40s
Saving money on invest retirement 20s 30s does not have to be complicated. We rounded up the essentials so you can spend less and skip the guesswork.
Key Takeaways
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- In this in-depth guide on how to invest for retirement, you’ll learn: Why retirement investing is different from other types of investing.
In this in-depth guide on how to invest for retirement, you’ll learn:
- Why retirement investing is different from other types of investing.
- How to determine the amount of money you need for retirement.
- How to choose the best retirement plan.
- The best asset allocation for retirement investing.
- Tips for building, growing and managing your retirement portfolio.
Table of Contents
ToggleInvesting for Retirement vs. Other Types of Investing
Retirement investing is different.
When investing in individual stocks, your goal is to outperform the market. (Otherwise, you’d just invest in a fund that tracks the market as a whole.) With retirement investing, you have a specific goal in mind , such as accumulating an amount of money that will safely last you the rest of your life.
The stakes are high. Missing your target has severe consequences. Unlike saving for other goals, like paying for your kids’ college or buying a home, there’s no loan program that can bail you out from having an inadequate retirement fund.
In other words, retirement savings should be high on your list of financial priorities. And the key to successful retirement savings is to find an optimal balance between saving enough today while still accomplishing your other short-term financial priorities.
When Should You Start Saving for Retirement?
Of course, the hard question is exactly how to go about striking a good balance between saving for retirement , which may be decades away , and achieving your shorter-term goals, like paying off debt or placing a down payment on a home. And just as hard is figuring out how much you’ll actually need for retirement.
The first thing to know is that there are tremendous advantages to investing for retirement as early as possible.
How significant are those advantages?
Consider this scenario:
- Investor A: Invests $500 a month from the ages of 20 to 30. After that, does not invest a single dollar more for retirement, instead allowing that money to grow from the ages of 30 to 60.
- Investor B: Does not invest before age 30, but invests $500 a month from the ages of 30 to 60.
Who has more money?
Start AgeEnd AgeMonthly ContributionTotal ContributionsBalance at 60 w/ 7% ReturnInvestor A2030$500$60,000$702,421.17Investor B3060$500$180,000$609,985.50Believe it or not, the answer is Investor A.
Even though they made 20 years fewer contributions, they ended up with nearly $100,000 more saved for retirement due to the power of compounding returns.
Now, should you save as much as you possibly can for retirement, sacrificing your quality of life today to leverage the benefits of starting early? Not necessarily. It’s about a balance. And this balance is personal to your specific financial situation and goals.
At The Ways To Wealth, we teach saving at least 15% (and ideally 20%) of gross income for long-term retirement savings and wealth accumulation throughout your 20s and 30s. Like all financial advice, you want to customize this based on your own goals and situation.
For example, if you’d like to retire earlier, or are in your 40s and getting a later start, you’d want to save more than 20%.
Types of Retirement Accounts to Consider
Something else that’s different about retirement investing is the fact that there are specific types of accounts set up under our tax code that provide valuable tax advantages.
The most popular of these are:
- Individual Retirement Accounts (IRAs): An account you can set up on your own.
- 401(k) and 403(b): A retirement account that’s offered by an employer. Some employers even match your contributions up to a certain percentage of your salary; if so, that makes these accounts the ideal place to start saving.
If you’re self-employed, there are good options available as well. These include an SEP IRA or a solo 401(k), which offer similar tax benefits.
For both IRAs and 401(k)s, you can choose to invest in a Roth or traditional account.
- Roth IRA: You contribute after-tax money, and both your contributions and earnings can be withdrawn tax-free after age 59 ½.
- Traditional IRA. You contribute pre-tax money and then pay taxes upon withdrawal.
The tax savings provided by these accounts offer some significant advantages. However, they do come at the cost of liquidity. There are penalties (and in most cases, taxes) for withdrawing money from these accounts prior to retirement.
Depending on your situation, one account type will be better than the other. Overall, a Roth makes sense if you believe your tax rate is lower today than it will be at the time of withdrawal. Conversely, a traditional account makes more sense if you believe your tax rate is higher today than it will be at the time of withdrawal.
For a more detailed analysis, see our guide: Roth vs. Traditional IRAs.
Asset Allocation for Retirement Portfolios
Once you’ve chosen a type of retirement account, the next step is determining specifically what to invest in. This step is called asset allocation.
With retirement investing, you want to invest more aggressively when you’re young and taper that aggressiveness as you get older. Since you won’t need the money for decades, you can more easily weather the short-term declines frequently associated with stocks while still benefiting from their consistent long-term growth.
For reference, when you zoom out and look at the past 20 years, you can see that stocks offer high returns with the occasional dip.
The market crash of 2008 hardly seems like a blip on the radar when you look at stock returns over time.As you get older, your portfolio should become more conservative. Specifically, you want to move away from having a significant percentage of highly volatile investments like stocks, instead favoring stable ones like bonds and safer alternative investments. At this point in your life, you’re closer to needing to
Final Thoughts
The bottom line: a little research on invest retirement 20s 30s goes a long way. Compare your options, watch for seasonal offers, and never pay full price when a better deal is one click away.
Originally published at thewaystowealth.com.
R.J. Weiss
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