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When you’re in your 20s, retirement may be the last thing on your mind. But thinking about retirement now can help ensure your financial security in the future.
The longer you have to save for retirement, the better. Here’s why you should start retirement planning and investing in your 20s.
Key Points
• Starting retirement planning in their 20s allows individuals more time to build savings and benefit from compound returns.
• Compound returns may help early savers grow their money exponentially over a longer period.
• Calculate retirement savings goals and choose suitable savings vehicles, such as a 401(k), traditional IRA, or Roth IRA.
• Young investors with a long time horizon can generally afford a more aggressive portfolio than older investors.
• As retirement approaches, individuals can shift investments to less risky assets to help protect savings.
Main Reason to Start Saving for Retirement Early
When you start investing in your 20s, even if you begin with just a small amount, you have more time to build your nest egg. Typically, having a long time horizon means you have time to weather the ups and downs of the markets.
What’s more — and this is critical — the earlier you start investing, the more time you have to take advantage of the power of compound returns, which can help your investment grow over time.
Here’s how compound returns work: If the money you invest sees a return, and that profit is reinvested, you earn money not only on your original investment, but also on the returns. In other words, both your principal and your earnings could gain value over time. And the more time you have to invest, the more time your returns may compound.
Compound Returns Example
Imagine you are 25 with plans to retire at 65. That gives you 40 years to save up your nest egg. Now, let’s say you invest $5,000 in a mutual fund in your retirement account, and the fund has an annual rate of return of 5%. After a year you would have $5,250, including $250 of earnings (minus any investment or account fees). The following year, assuming the same rate of return, you would have $5,512.50, including $262.50 of earnings on the $5,250.
While there are no guarantees that the money would continue to gain 5% every year — investments involve risk and can lose money — historically, the average return of the S&P 500 is about 10% per year, or about 7% adjusted for inflation.
That might mean you earn 3% one year and 8% another year, and so on. But over time your principal would likely continue to grow, and the earnings on that principal would also grow. Imagine that playing out over 40 years and you can see why it’s important to start investing early for your retirement.
💡 Quick Tip: Before opening an investment account, know your investment objectives, time horizon, and risk tolerance. These fundamentals will help keep your strategy on track and with the aim of meeting your goals.
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How to Start Saving for Retirement in Your 20s
If you’re new to saving, starting a retirement fund requires a little bit of planning.
Step 1: Calculate how much you need to save
Set a goal. Consider your target retirement date and how long you’ll expect to be retired based on current life expectancy. What kind of lifestyle do you want to lead? And what do you expect your retirement expenses to be?
Step 2: Choose an investment vehicle
When it comes to where to put your savings, you have a number of options. For example, you can participate in your workplace 401(k) if you have one. You could also open an individual retirement account (IRA). Read more about both these options and how they work below.
Many retirement savers also opt to use an investing account, such as a taxable brokerage account.
Keep in mind that investments in stocks or other securities involve risk, but they may allow for the possibility of better returns. Young investors may be better positioned than older investors to take on additional risk, since they have time to recover after a market decline. However, the amount of risk you’re willing to take on is an important consideration and a personal choice.
Step 3: Start investing
Once you’ve opened an account, your investment strategy depends on age, goals, time horizon and risk tolerance. For example, the longer you have before you retire, the more money you might consider investing in riskier assets such as stock, since you’ll have longer to ride out any rocky period in the market. As retirement approaches, you may want to re-allocate more of your portfolio to typically less risky assets, such as bonds.
Types of Retirement Plans
If you’re interested in opening a tax-advantaged retirement plan, there are three main account types to consider: 401(k)s, traditional IRAs, and Roth IRAs.
401(k)
A 401(k) plan is an employer sponsored retirement account that you invest in through your workplace, if your employer offers it. You make contributions to 401(k)s with pre-tax funds (meaning contributions lower your taxable income), usually deducted from your paycheck. Your 401(k) will typically offer a relatively small menu of investments from which you can choose.
Employers may also contribute to your 401(k) and often offer matching contributions. Consider saving enough money to at least meet your employer’s match, which is essentially free money and an important part of your total compensation.
Some companies also offer a Roth 401(k), which uses after-tax paycheck deferrals.
Individuals under age 50 can contribute up to $23,500 in their 401(k) in 2025. Those aged 50 and up can make an additional catch-up contribution of $7,500. And thanks to SECURE 2.0, individuals ages 60 to 63 can make a higher catch-up contribution of $11,250 instead of $7,500.
Money invested inside a 401(k) grows tax-deferred, and you’ll pay regular income tax on withdrawals that you make after age 59 ½. If you take out money before then, you could owe both income taxes and a 10% early withdrawal penalty.
You must begin making required minimum distributions (RMDs) from your account by age 73.
Traditional IRA
Traditional IRAs are not offered through employers. Anyone can open one as long as they have earned income. Depending on your income and access to other retirement savings accounts, you may be able to deduct contributions to a traditional IRA on your taxes.
As with 401(k) contributions, you will owe taxes on traditional IRA withdrawals after age 59 ½ and you may have to pay taxes and a penalty on early withdrawals.
In 2025, traditional IRA contribution limits are $7,000 a year or $8,000 for those ages 50 and up. Compared to 401(k)s, IRAs typically offer individuals the ability to invest in a broader range of investments. These investments can then grow tax-deferred inside the account. Traditional IRAs are also subject to RMDs at age 73.
Roth IRA
Unlike 401(k)s and traditional IRAs, contributions to Roth IRAs are made with after-tax dollars. While they provide no immediate tax benefit, the money inside the account grows tax-free and it isn’t subject to income tax when withdrawals are made after age 59 ½.
You can also withdraw your contributions (but not the earnings) from a Roth at any time without a tax penalty as long as the Roth has been open for at least five tax years. The first tax year begins on January 1 of the year the first contribution was made and ends on the tax filing deadline of the next year, such as April 15. Any contribution made during that time counts as being made in the prior year.
So, for instance, if you made your first contribution on April 10, 2025, it counts as though it were made at the beginning of 2024. Therefore, your Roth would be considered open for five tax years in January 2029.
Roth IRAs are not subject to RMD rules. Contribution limits are the same as traditional IRAs.
Investing in Multiple Accounts
Individuals can have both a traditional and Roth IRA. But it’s important to note that the contribution limits apply to total contributions across both. So if you’re 25 and put $3,500 in a traditional IRA, you could only put up to $3,500 in your Roth as well in 2025.
You can also contribute to both a 401(k) and an IRA, however if you have access to a 401(k) at work (or your spouse does) you may not be able to deduct all or any of your IRA contributions, based on your modified adjusted gross income and tax filing status.
Retirement Plan Strategies
The investment strategy you choose will depend largely on three things: your goals, time horizon, and risk tolerance. These factors will help you determine your asset allocation — what types of assets you hold and in what proportion. Your retirement portfolio as a 20-something investor will likely look very different from a retirement portfolio of a 50-something investor.
For example, those with a high risk tolerance and long time horizon might hold a greater portion of stocks. This asset class is typically more volatile than bonds, but it also provides greater potential for growth.
Generally speaking, the shorter a person’s time horizon and the less risk tolerance they have, the greater proportion of bonds they may want to include in their portfolio. Here’s a look at some portfolio strategies and the asset allocation that might accompany them:
| Sample Portfolio Style | Asset allocation |
|---|---|
| Aggressive | 85% stocks, 15% bonds |
| Moderately Aggressive | 80% stocks, 20% bonds |
| Moderate | 60% stocks, 40% bonds |
| Moderately Conservative | 30% stocks, 70% bonds |
| Conservative | 20% stocks, 80% bonds |
The Takeaway
Even if you don’t have a lot of room in your budget in your 20s to start investing, putting away as much as you can as early as you can, can go a long way toward helping you save for retirement. As you start to earn a bigger salary, you can increase the amount of money you save over time.
Ready to invest for your retirement? It’s easy to get started when you open a traditional or Roth IRA with SoFi. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).
FAQ
How much should a 25 year old have in a 401(k)?
There is no one specific amount a 25-year-old should have in their 401(k), but a common guideline suggests having about half your annual salary saved by age 25. So if you earn $30,000 a year, you’d aim to save approximately $15,000 by age 25, using this benchmark.
At what age should you have $50,000 saved?
You should aim to have saved $50,000 by about age 30. Here’s why: According to one rule of thumb, you should have the equivalent of one year’s salary saved by age 30. The average salary for individuals ages 25 to 34 is approximately $59,000, according to the latest data from the Bureau of Labor Statistics. So if you save $50,000 by around age 30, you are more or less in line with that target.
Is 26 too late to start saving for retirement?
No, age 26 is not too late to start saving for retirement. In fact, it’s never too late to start saving, but the sooner you start, the better. The earlier you start putting money away for retirement, the more time your money has to grow.
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