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Key Takeaways
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Starting to save in your 20s could leave you with about twice the savings as starting in your 30s and more than four times as much vs. starting in your 40s.
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That’s because the math of compounding has far more time to work its magic.
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A typical 401(k) setup, where you contribute around 8% to 10% and your employer kicks in a match of 4% or more, gets you to the 12% to 15% total savings rate experts recommend.
Starting retirement planning in your 20s is a genuine game-changer. Thanks to compounding, every dollar you invest in your early 20s can work for more than four decades, potentially far more than the results you would get from starting in your 30s or 40s—even if you contribute the same amount each year.
Experts point to a simple rule of thumb: aim to save 12% to 15% of your pay, including any employer match, and try to make that a lifelong habit.
Tip
Many young Americans are getting the message about starting early: the median age of middle-class (those earning $50k to $199k) 20-something savers opened their retirement account at age 21.
The Compounding Countdown: Why Your 20s Are Prime Time
Compounding leads to exponential growth. Two savers making similar annual contributions end up with very different results only because one of them started earlier.
In your 20s, you have about 40 years for your contributions to compound. That’s an entire decade of time for those savings to generate their own gains, which then generate even more gains from new contributions, rising stock prices, and dividends. The cycle repeats itself over and over. By beginning in your 20s, every dollar you put in has maximum runway to grow, even as you’re likely just starting out in an entry-level job or early in your career.
So, how much should you contribute? Most experts recommend an annual contribution rate of about 12% to 15% of your gross pay, which includes any employer match.
The 10-Year, $1.2 Million Difference
Below, we model three savers who begin at age 22, 32, or 42, and all are saving until the age of 67. We assume a 7% long-run rate of return (squarely within big-firm planning ranges), a $6,000 employee 401(k) contribution with a $2,400 employer match (total $8,400/year). In the second column, we add a $7,000 annual IRA contribution.
The 22-year-old contributes only 10 more years than the 32-year-old, yet ends with about double the balance; starting at 42 leaves you with barely a quarter of the 22-year-old’s total, despite making identical annual contributions.
Importantly, these projections are conservative and don’t account for annual increases in contribution limits or maxing out “catch-up” contributions after the age of 50.
4 Ways to Lock In Your Early Advantage
- Capture the full match: The employer match is effectively free money, and it’s very easy to leave it on the table. Most companies match 4%–5% of pay; any less than that and you’re leaving free money on the table.
- Try to save 12%–15%: Vanguard found that total savings rates of around 12% are very common in plans with an employer contribution. This is a powerful starting point for younger savers.
- Automate the increase: Some plans offer auto-increase features that nudge your deferral rate up by 1% a year until you reach the 15% target. If yours doesn’t, set a calendar reminder to increase your rate with every raise.
- Add on with an IRA: If you can save beyond your 401(k), an IRA (traditional or Roth) lets you contribute up to $7,000 tax-free in 2025. A small monthly contribution can compound into big numbers over four-plus decades.
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