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Money

Here’s why it's so important to start saving and investing in your 20s

Select looks at why it's so important to start saving for retirement sooner rather than later.

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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.

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How to save more money

First off, there are generally two ways for you to save money: By cutting back on your expenses or finding a way to earn more money. 

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.

Why you should start investing in your 20s

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.

Fidelity Investments

  • Minimum deposit and balance

    Minimum deposit and balance requirements may vary depending on the investment vehicle selected. No minimum to open a Fidelity Go account, but minimum $10 balance for robo-advisor to start investing. Minimum $25,000 balance for Fidelity Personalized Planning & Advice

  • Fees

    Fees may vary depending on the investment vehicle selected. Zero commission fees for stock, ETF, options trades and some mutual funds; zero transaction fees for over 3,400 mutual funds; $0.65 per options contract. Fidelity Go is free for balances under $10,000 (after, $3 per month for balances between $10,000 and $49,999; 0.35% for balances over $50,000). Fidelity Personalized Planning & Advice has a 0.50% advisory fee

  • Bonus

    Find special offers here

  • Investment vehicles

    Robo-advisor: Fidelity Go® and Fidelity® Personalized Planning & Advice IRA: Fidelity Investments Traditional, Roth and Rollover IRAs Brokerage and trading: Fidelity Investments Trading Other: Fidelity Investments 529 College Savings; Fidelity HSA®

  • Investment options

    Stocks, bonds, ETFs, mutual funds, CDs, options and fractional shares

  • Educational resources

    Extensive tools and industry-leading, in-depth research from 20-plus independent providers

Terms apply.

Betterment

On Betterment's secure site
  • Minimum deposit and balance

    Minimum deposit and balance requirements may vary depending on the investment vehicle selected. For Betterment Digital Investing, $0 minimum balance; Premium Investing requires a $100,000 minimum balance

  • Fees

    Fees may vary depending on the investment vehicle selected. For Betterment Digital Investing, 0.25% of your fund balance as an annual account fee; Premium Investing has a 0.40% annual fee

  • Bonus

    Up to one year of free management service with a qualifying deposit within 45 days of signup. Valid only for new individual investment accounts with Betterment LLC

  • Investment vehicles

  • Investment options

    Stocks, bonds, ETFs and cash

  • Educational resources

    Betterment RetireGuide™ helps users plan for retirement

Terms apply.

If you want to start saving cash for more near term needs, like an emergency or house fund, consider putting that in a high-yield savings account like LendingClub High-Yield Savings account or the Marcus by Goldman Sachs High Yield Online Savings account. These accounts don't fluctuate with the market but still pay out interest on your idle cash.

LendingClub High-Yield Savings

LendingClub Bank, N.A., Member FDIC
  • Annual Percentage Yield (APY)

    2.15%

  • Minimum balance

    No minimum balance requirement after $100.00 to open the account

  • Monthly fee

    None

  • Maximum transactions

    None

  • Excessive transactions fee

    None

  • Overdraft fees

    N/A

  • Offer checking account?

    Yes

  • Offer ATM card?

    Yes

See our methodology, terms apply.

Pros

  • Strong APY
  • No minimum balance required
  • No monthly fees
  • Free ATM card and no ATM fees

Cons

  • $100 minimum opening deposit required, though there's no minimum balance after that
  • No physical branch locations

Marcus by Goldman Sachs High Yield Online Savings

Goldman Sachs Bank USA is a Member FDIC.
  • Annual Percentage Yield (APY)

    1.90%

  • Minimum balance

    None to open; $1 to earn interest

  • Monthly fee

    None

  • Maximum transactions

    Up to 6 free withdrawals or transfers per statement cycle *The 6/statement cycle withdrawal limit is waived during the coronavirus outbreak under Regulation D

  • Excessive transactions fee

    None

  • Overdraft fees

    N/A

  • Offer checking account?

    No

  • Offer ATM card?

    No

See our methodology, terms apply.

Pros

  • No minimum balance (just $1 to earn interest)
  • No monthly fees
  • Up to 6 free withdrawals or transfers per statement cycle*
  • Easy-to-use mobile banking app
  • Offers no-fee personal loans

Cons

  • No option to add a checking account
  • No ATM access
  • You can't deposit a check via the mobile app

Bottom line

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.

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Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
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