Money you invest in your 20s has about 40 years to grow, so small amounts go far. Contribute enough to your 401(k) to get the full employer match, open a Roth IRA while your tax rate is low, and invest both accounts mostly in stocks through a target-date or broad stock index fund.
Starting early can matter more than the amount you put in, since money you invest at 25 gets 10 more years to compound than money you invest at 35.
A Roth IRA suits your 20s. You pay income tax on what you put in at today’s rate, and in retirement the money and its growth come out tax-free. That trade pays off most when your tax rate is low, and on a first salary it’s likely the lowest it will be in your career.
With about 40 years until retirement, you can hold mostly stocks, which swing more than bonds but have historically grown more. If the market drops 30% when you’re 25, every contribution buys shares for 30% less while prices stay down, and you won’t need to sell for decades. Keep buying through it.
Take the steps in this order. First, get the full match, the money your employer adds when you contribute, as soon as your plan allows. Build a starter emergency fund, a small cash cushion for surprise bills, at the same time. Next, pay off any high-interest debt, such as a credit card balance. Then, if your income is under the IRS’s ceiling for Roth contributions, open a Roth IRA and contribute up to the yearly limit, $7,500. Anything past that goes back into your 401(k).
In both accounts, pick a low-cost target-date fund named for the year you plan to retire. It holds mostly stocks while that year is far off and shifts toward bonds as it nears. A broad stock index fund, which owns small slices of hundreds or thousands of companies, works too.
At a hypothetical 7% average annual return, raising your contributions from 6% to 10% of a $50,000 salary adds $2,000 a year that grows to about $400,000 over 40 years. So each time your pay goes up, save another 1% or 2% of it until you and your employer together put in 15% of your pay.
To choose a firm for your Roth IRA, compare the best places to open an IRA.
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