The Importance of Investing in Your Retirement in Your 20’s

1/2/2024

Investing is to allocate money with the expectation of a positive benefit/return in the future. This means owning an asset or an item to generate income from that asset or an increase in the value of your asset over time (appreciation). With monthly bills and debts to be paid, many young people don’t prioritize any kind of investing, which may be exacerbated if they don’t know much about it. 

It can be far too easy for adults in their 20s to overlook investing. It is an excellent way to build wealth and plan for your financial goals, particularly if you start sooner rather than later. Young people have a considerable advantage when it comes to investing because your assets have longer to appreciate in value. Investing is the primary method for saving for retirement, and it can help you reach many other financial milestones along the way. The most important thing is to start investing early, even if your initial investments are small.

The importance of compound interest

Possibly the most significant benefit of investing when you’re young is the impact that compound interest will have on your portfolio. What is compound interest?  Compound interest is interest calculated on the principal investment and any existing interest together over a given period. In simple terms, compound interest can be defined as interest you earn on interest. Compounding occurs when you reinvest your investment earnings, meaning that those interest earnings begin to work for you.

Read More: Understanding Compound Interest

To take full advantage of compound interest, start investing in your 20’s. With compound interest, you don't have to put more money in the account to keep earning interest on the previous year’s interest. With financial investments, time is your friend. Starting early gives you more time for interest to compound and provides greater rewards to enjoy later.

Investing early allows for more risk and a potentially greater reward

If you’re 25 and plan to retire at 65, you have a 40-year time frame before you plan to use the money you’re investing. The younger you are, the more time you have to rebound if your higher-risk investments experience a loss.  Additionally, with time on your side, you can afford to experiment a little with your portfolio.  A diversified portfolio spreads out risk, so your eggs aren’t all in the same basket. Young investors have time to explore their options without harming their chances of retiring comfortably. The closer to retirement you are, you will be less tolerant of higher-risk investments because it may place your nest egg in jeopardy.

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How to start investing

Here are some great ways to start investing in your 20s.

Make the most of your 401(k)

If you work for a company that sponsors a retirement plan such as a 401(k) or a 403(b), the first thing is to check if you’re eligible and if a company match is available. If you do have access to an account, start contributing as soon as you can and always at least pay yourself what the company matches. The company match is almost like “free money” that can help boost your savings faster, especially at a time in your life when you may not be able to set aside much.

Invest in a Roth IRA

If you don’t have access to a 401(k), it’s still important to invest in your retirement. So, open a Roth Individual Retirement Account, or IRA. When you open and contribute to a Roth IRA, you set aside after-tax dollars, which can then grow tax-free for decades. In your 20‘s as you are beginning your career, you’ll likely have a lower income, putting you in a lower tax bracket. Being taxed at a lower rate allows you to get a little more bang for your buck when you deposit your after-tax funds in your IRA than someone who is taxed at a higher rate.

Stock Market Investing

There are some low-cost options for younger investors to get started with the stock market. An exchange-traded fund (ETF) is a type of security investment whereby you get a bundle of assets you can buy and sell. An ETF is a great option for investors on a lower budget because it’s an easily marketable security while providing diversity in your portfolio.

Mutual funds are an alternative for those investing on a lower budget. A mutual fund is a professionally managed group of diversified stocks from several companies. These are great for young investors because you can pick an area of the stock market you’re interested in investing in, and there’s bound to be a mutual fund that consists of companies from that sector.

Build an emergency fund

Building an emergency fund can help you keep your retirement savings untouched should unexpected expenses arise. It’s smart to have emergency savings, especially as most emergencies can cost hundreds of dollars. The suggested starting point for your emergency fund is three months’ living expenses. After you’ve securely saved three months’ expenses, work your way up to saving a total of six months of living expenses.

Invest in real estate

Real estate investments might involve purchasing property, such as a rental house, a fixer-upper to flip, or investing in shares of a real estate investment trust (REIT). An REIT is a fund that invests primarily in commercial real estate. That can include office buildings, retail space, large apartment complexes, and similar properties. All options have the potential for long-term growth and may even provide a passive income stream.

Read More: Getting Started With Stock Market Investing

Take Precautions

Once you’ve determined which investment strategy is right for you, proceed with caution. Every type of investment carries some level of risk. While higher-risk investments may have greater potential for high returns, they also increase your chances of losing your money entirely. Consider the long-term when investing in your 20’s. You’ll only experience the benefits of compound interest if your investments perform well.  A moderate-risk investment will, most likely, perform well over many years providing sound growth of your retirement funds. Think about your financial situation before deciding which investments are right for you.

Even if you’re only able to contribute a few hundred dollars a month to your retirement fund, the difference in earnings from starting in your 20s compared to later in life could end up being tens of thousands of dollars. Laying the groundwork in your 20’s is wonderful so that in your 30’s, you can really accelerate your financial goals. Your plans will likely change and update over time, but getting started with a retirement account is one of the most important things you can do for yourself in your 20s. Not only will you ensure your money keeps up with inflation, but you’ll also reap the benefits of decades worth of compound interest on your contributions.

 

 

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