How to Start Saving for Retirement Now: 5 Tips for 20-Somethings

A young man anayzing his money or his finances (shallow DOF with focus on eyes).
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If you're in your 20s, retirement can feel like it's a lifetime away. And it is -- but that's exactly why you should start thinking about it now: A long time frame is the greatest advantage you have as an investor. By getting a solid foundation in place early, you set yourself up to cruise to a far more comfortable retirement than anyone who waits until their 30s or later to start saving.

Indeed, it's quite possible for you to retire as a multimillionaire using nothing more than a little bit of money, consistently invested for quite a long time. You don't even need Warren Buffett-like investing skills to get there, just the patience, discipline and consistency to keep to a plan.

These five tips will start you on the path toward golden years that are truly golden.

Tip 1: Rely on Your Most Powerful Tool: Time

If you're in your 20s and remain in good health, you can reasonably expect to work for roughly the next 40 years. If you'd like to leave the rat race early, though, or if you want to strive for the kind of retirement only available to the truly wealthy, now is your absolute best chance to position yourself for that kind of success.

Just take a look at the table below that shows how much you can end up with after 40 years of consistently investing every month:
Monthly Investment 10% Annual Returns 8% Annual Returns 6% Annual Returns 4% Annual Returns
$2,000 $12,648,159 $6,982,016 $3,982,981 $2,363,923
$1,500 $9,486,119 $5,236,512 $2,987,236 $1,772,942
$1,000 $6,324,080 $3,491,008 $1,991,491 $1,181,961
$500 $3,162,040 $1,745,504 $995,745 $590,981
$250 $1,581,020 $872,752 $497,873 $295,490
$100 $632,408 $349,101 $199,149 $118,196
Data from author's calculations.

That $12.6 million could be yours if you consistently invest $2,000 each month at 10 percent annual returns. That 10 percent annual return level is about what the S&P 500 (^GSPC) has returned on average, including dividend reinvestment, over the long haul.

While there are no guarantees in the market, notice how you still wind up a multimillionaire if you sock away that much every month and only earn 4 percent average annual return during those 40 years.

Tip 2: Leverage your raises to go from $0 savings to $2,000

Of course, the toughest part of investing $2,000 a month -- or even $100 a month, for that matter -- is coming up with that kind of cash in the first place. While, as a 20-something, you probably aren't at the high end of your salary curve, you are more likely in the high growth part of that curve. As you gain experience and build expertise in your chosen field, your salary will likely rise faster now than it will once you've reached mastery level pay in your profession.

Start with what you can put away now, but take advantage of each raise to sock away more. You won't miss the money you hadn't been spending before you got the raise, but that cash can go a long way towards getting your long term investing plan up to full speed. And even if you never expect to reach that full $2,000 target, remember that the more you put away for a longer period of time, the better off you'll be, all else being equal.

Tip 3: Make it automatic

If you want to get serious about investing decent chunks of change for your future, one of the most powerful tools at your disposal is your employer's direct deposit program. You'll be far less tempted to spend money that gets automatically sent to an investment account or automatically contributed from your paycheck to your 401(k), 403(b), or other employer-sponsored retirement plan.

No matter what the market does, pretty quickly after starting to automatically invest, you'll probably notice a remarkable thing -- that you don't miss the money nearly as much as you may have thought you would. Then just let that cash continue to work on your behalf for decades and eventually it will help you retire in style.

Tip 4: Take full advantage of free money

Perhaps the best part of the quest to get to your monthly savings target is that you don't have to do it alone. Uncle Sam and your boss will likely chip in.

If you have a qualified employer-sponsored traditional 401(k) or 403(b) plan, every dollar you stick in that plan is tax deferred, so you don't pay income taxes on that money.
That reduces your out-of-pocket costs. Plus, if your employer offers a match on your contribution, you're getting paid to save, and that's tough to beat.

In 2013, the maximum you can sock away as a 20-something to one of those tax-deferred employer sponsored plans is $17,500. If you don't have access to an employer-sponsored plan at work, you can still make a deductible contribution to your traditional IRA, which offers the same immediate tax deduction as a contribution to a plan at work. You can invest $5,500 in an IRA in 2013.

If you have access to a retirement plan at work, you can still contribute to an IRA -- you just may not be able to deduct that contribution. Regardless of whether you're eligible to deduct it, money you put in your IRA or qualified employer-sponsored plan grows tax deferred on your behalf, and perhaps even tax free if you're using a Roth style account. $17,500 in an employer plan plus $5,500 in your IRA is $23,000 a year -- almost that entire $2,000 a month. An employer match can easily put you over the top.

Tip 5: Keep it simple

Finally, remember that these potential future amounts are based on the idea that your investments will earn somewhere around what the S&P 500 has earned over the long run. One way to start out on that track in your 20s is by putting your money in a low-cost S&P 500 tracking fund like the S&P Depository Receipts (SPY). As you get more comfortable investing over time or should you get more financially conservative as you age, you can always adjust your allocation later.

If you do this, though, it's important to remember that while the market has performed well over time, it doesn't go up in a straight line. The market can drop for years at a time, as it did in the recent "lost decade." That's why it's so important to consistently invest for your retirement, every month.

When the market drops, your account balance may fall, but each new contribution or dividend reinvestment buys more shares of the investment you're buying. Those additional shares will still be yours when the market starts to recover, boosting the benefits you get from buying low.

Get started now

The primary advantage you have in your 20s is time. The sooner you start saving for your retirement, the easier it is for you to get there comfortably. Following these five tips will get you the foundation you need to succeed. Once you get your plan in motion, you'll be amazed at how much better off you'll be than had you never started in the first place.

Motley Fool contributor Chuck Saletta has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

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69 Comments

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jenniferetmfs

Start early, start now! That's really the best advice to give someone looking at retiring planning. You can learn more about it at http://www.mutualfundstore.com/planning-and-retirement. There are lots of options to consider, like IRAs, mutual funds, stocks, and other types of investment plans. Once you get that plan in place, the better off you will be. Good luck!

Yesterday at 12:14 AM Report abuse rate up rate down Reply
willim_care

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December 04 2013 at 1:14 AM Report abuse rate up rate down Reply
toosmart4u

The social security trustees has reported there will be a 25% cut in monthly checks in 2033 if nothing is done to shore up the program. You must know when S.S. first came about every republican in office voted against the program and the same when Medicare came out. The GOP wants to end these 2 programs.

August 20 2013 at 3:37 AM Report abuse rate up rate down Reply
toosmart4u

Most of you people are just throwing bull out there when it comes to social security. S.S. is your private account. The more you pay in the higher your monthly check will be. Everyone does not receive the same amount. Presidents have taken monies out of S.S. to cut their debt at the end of the year. They replaced this money with federal bonds which does not pay much interest. The GOP wants to write off when they owe S.S. Bush jr. took out 300 to 400 billion a year in his last 6 years.

August 20 2013 at 3:34 AM Report abuse rate up rate down Reply
cslinz62

20yr olds today don't have common sense yet to save $. Do they even finish school still these days?
I never really understood tax deferred. I'd rather pay taxes on my CD's now then wait til I retire, on a fixed income & don't have the $ to pay the darn taxes that I deferred for the last 30yrs. But that's just me.

August 19 2013 at 9:58 PM Report abuse rate up rate down Reply
1 reply to cslinz62's comment
rhys.darby

lol you fool. "Do they even finish school still these days?"
I'm assuming you went to school in the dark ages when it was not nearly as competitive or expensive. Colleges are primarily businesses, not institutions.

"20yr olds today don't have common sense yet to save $"
Stop generalizing a decade of an age group, it's a shallow practice and you will understand my point from my earlier comment about 'y'all growin up in the dark ages'.

I think you're forgetting that when a 21 year old graduates today with 160 THOUSAND dollars in debt while working and studying, he/she develops common sense. They wonder why ignorant adults think it's cool to talk about their past with this, "We did it, so why can't you" attitude.

I was lucky enough to go through school only because of a scholarship that left me with zero debt, but I still worked both on campus and off, all through school. I know tons of my peers who did not have their parents financial aid and they worked hard and saved while in school, spending their money conservatively. The debt builds quickly and some take leave of absence to work full time and help pay for school.

Stop this nonsense about "KIDS THESE DAYS BLA BLA BLA". What would you know about being a kid today? lol.

October 08 2013 at 6:40 AM Report abuse +1 rate up rate down Reply
mustangmaniac01

Sorry but this theory only sounds good on paper, but isn't realistic. I don't know what planet the writer is living on, but most 20 yr olds and even 30 yr olds aren't making more than $12/hr these days. That is, if they're lucky! The job market is hardly stable and companies are free to fire just about anyone for any reason or whim. The problem started with our election last year. Most 18-20 yr olds voted for Obama because he's black. That makes him cool right? Never giving a real thought about what kind of job they'll end up with after college. Well, the reality is about to hit them! BIG TIME! They're competing with HS kids, middle agers, and retirees all trying to get the same menial low paying jobs because there isn't much else out there! Skills no longer matter as much as which applicant is willing to settle for the lowest pay! Saving money??? Are you serious??? These people will just be happy to get a job!

August 19 2013 at 7:28 PM Report abuse -1 rate up rate down Reply
Sonny

Saving at this point in our country is an act of futility. Inflation will wipe out any money saved during the next few years. You are better off spending it now or buying things that will hold their value.

August 19 2013 at 7:14 PM Report abuse rate up rate down Reply
1 reply to Sonny's comment
betty_brock

Sad but true.

August 19 2013 at 8:56 PM Report abuse -1 rate up rate down Reply
scottee

maybe congress should start saving taxpayer dollars and stop deficit spending?
maybe congress should only get their IRAs and social security for their retirement?
and maybe they should get a pay cut to the national average wage? and pay their own Obamacare premiums? maybe?

August 19 2013 at 2:03 PM Report abuse rate up rate down Reply
1 reply to scottee's comment
NixonVet

Maaybe you should learn Federal benefits. Federal employees now have 401k plans, and contribute into Social Security, something that changed in 1984. Federal employees pay healthcare premiums, in fact, the average BC/BS Federal premium is just shy of $600.00 per month, for the same 80/20 plan as civilians, $30/$40 co-pays, no vision, no dental.

August 19 2013 at 2:21 PM Report abuse +1 rate up rate down Reply
1 reply to NixonVet's comment
betty_brock

Most of them are dead wood.

August 19 2013 at 8:57 PM Report abuse -2 rate up rate down
mac2jr

House, baby, babies, car, cars, television, televisions, toys, sickness, accidents, sick children, sick parents, dying parents, job loss, company closings, inflation, schooling cost, moving cost, and a host of other items face the typical 20-year old and stay with him or her for decades, thus savings are not secure, and will not be, the only secure savings is the Social Security System..

August 19 2013 at 1:38 PM Report abuse +2 rate up rate down Reply
1 reply to mac2jr's comment
scottee

SS is not secure if the government is replacing the SS money with IOUs and there are more people taking SS money out than paying in. just saying....

August 19 2013 at 2:05 PM Report abuse -4 rate up rate down Reply
1 reply to scottee's comment
comment814

please stop thinking like the typical PEON, and get a grip! it is secure, but your not! just saying....

August 19 2013 at 9:48 PM Report abuse +1 rate up rate down
mily469

the current rigged system in place today is working for a few. I feel very sorry for 20somethings today for sure, same for us all actually.

August 19 2013 at 1:30 PM Report abuse -1 rate up rate down Reply
1 reply to mily469's comment
scottee

but congress is living in luxury.
is this okay with everyone?

August 19 2013 at 2:05 PM Report abuse +1 rate up rate down Reply