Why Starting Retirement Investments in Your 20s Could Change Your Life

Retirement might be the last thing on your mind if you’re in your 20s, but now is actually one of the best times to begin saving. You’ve got decades of potential growth thanks to the power of compound interest, especially if you contribute to a high-yield savings account or Roth IRA. Depending on the investments you choose for your retirement portfolio, you can earn interest, capital gains, and dividends on your investments. Even small, consistent contributions can go a long way.

Choosing the Right Investment Accounts

While the most important part of saving for retirement is starting to save as early as possible, you should consider all retirement accounts before selecting one. For one thing, you may not be eligible for all retirement accounts. Other accounts may have income restrictions.

Learn more about these investment accounts to find the best one for you:

Choosing the Right Investments

Depending on the type of retirement account you choose, you may be able to select your investments. Picking investments that match your risk tolerance and retirement timeline will help you get the most out of your retirement savings down the road. For example, younger investors are typically more risk-tolerant and can benefit from a riskier portfolio than someone close to retirement who wants the safety of guaranteed returns, even if it means less growth.

Although you can set up retirement accounts that are automatic based on your planned retirement date, if you want more control over your investments, check out these financial products:

• Target date funds: With this type of long-term investment account, you set your retirement date, and the account automatically adjusts to reduce risk as you get closer to retirement.
• Mutual funds: A money manager manages a portfolio of stocks, bonds, and other securities. All investors share the profits if the mutual fund is successful.
• Index funds: These passive mutual funds or exchange-traded funds are made up of stocks and bonds. They’re low-cost and designed for long-term investing.
• ETFs: An exchange-traded fund, or ETF, is a combination of assets that are bought and sold like stocks.
• Stocks: These are shares in a corporation that are publicly traded, so their price fluctuates. While stocks are riskier than passive investments, they typically outperform other products.
• Bonds: Bond owners lend money to bondholders, who repay the amount plus interest. These are fixed investment products.
• Annuities: These are contracts purchased by individuals from insurance companies. They offer a guaranteed income stream.

The Benefits of Investing Early

If we haven’t convinced you of the importance of investing as early as possible, think about this simple example. Imagine two people both put $500 a year into their retirement accounts and their accounts earn a 6% return. Both plan to retire at age 60.

Let’s say one person starts investing when they’re 20 and the other waits until they’re 40 to begin contributing. Here’s how much each account would have when they reach retirement (keeping in mind they contributed the same amount every year):

• The 20-year-old investor would have saved $87,166.70
• The 40-year-old starting investor would have saved $21,099.93

The Bottom Line

If you’re intimidated by the idea of saving for retirement or don’t think you can contribute very much, realize that starting early is one of the best things you can do. Even if you’re not able to save much, the power of compound growth can really add up. Check out your investment options and choose one that can help you reach your retirement goals.