Saving for retirement prior to age 30 makes it easier to build a large nest egg for retirement. Young people can take advantage of decades of investment growth, and have a lot to gain by taking steps to minimize investment fees and taxes. Aim to make these retirement planning moves before age 30:
Save in a 401(k) plan.
Once you land a job with a 401(k) plan, take the time to enroll and start saving. The withholding from your paycheck requires little effort and adds up quickly. However, if you are automatically enrolled, take a second look at the employer selected savings rate, which is often too low, and the default investment option, which won't be right for everyone.
Boost your 401(k) contributions.
New employees with low starting salaries often select a modest 401(k) contribution. As you get raises, remember to boost your retirement savings rate. Some 401(k) plans have an automatic escalation feature that will increase the amount you save over time without any further action.
Qualify for a 401(k) match.
If your company provides a 401(k) match, make sure you save enough to qualify for the employer contributions. Some 401(k) plans have waiting periods before a 401(k) match can be earned and vesting schedules that specify how long you need to stay at the company before you can keep the 401(k) match. Familiarize yourself with the 401(k) match rules to make sure you get the biggest 401(k) match possible.
Open an IRA.
If you don't have a 401(k) plan at work or want to save outside of your workplace retirement account, consider opening an individual retirement account. IRAs have similar tax breaks to 401(k) plans and a wider selection of investment options, but much smaller contribution limits.
Roll over your 401(k) to an IRA.
When you change jobs, you can leave your retirement savings in the 401(k) plan or move your money to an IRA. Transferring your retirement savings to an IRA maintains the tax benefits of your 401(k) plan and allows you to consolidate multiple 401(k) accounts, which can make it easier to manage your retirement savings.
Select long-term investments.
The money in your retirement account has several decades to grow before retirement. The long time horizon allows you to invest a significant potion of your savings in equities, because you have plenty of time to recover from any stock market declines before retirement. As you get closer to retirement, you can gradually shift a portion of your retirement savings into more conservative investments.
Switch to lower-cost funds.
When selecting funds in your retirement account, pay careful attention to the expense ratio of each investment option. Fees reduce your investment returns each year, and high-cost funds can result in a significantly smaller nest egg upon retirement. Your 401(k) plan is required to send you a fee disclosure statement each year that lists how much each fund in your 401(k) plan costs to own.
Engage in tax planning.
Annual taxes can drag down the value of your investments. Take advantage of retirement account tax breaks to build your retirement savings faster. Traditional 401(k)s and IRAs allow you to defer paying income tax on your retirement savings, while Roth accounts lock in your current tax rate and set you up for tax-free withdrawals in retirement. Low-income retirement savers can additionally claim the saver's tax credit.
Consider a Roth account.
Young people who currently pay a low tax rate have a lot to gain by saving in a Roth IRA or Roth 401(k). The after-tax dollars you deposit in a Roth account will grow without being taxed, and withdrawals after age 59 1/2 from accounts at least five years old are tax-free. You also aren't required to take Roth IRA withdrawals in retirement, so the money can continue to grow until you need it or be left to heirs.
Create a My Social Security account.
A My Social Security account allows you to review your annual earnings and contributions to the Social Security program and correct errors. You can also get an estimate of your potential retirement benefit, disability benefit and the amount family members will receive if you pass away. Knowing how much you can expect to receive from Social Security can help you decide how much you need to save for retirement.
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