Retirement may seem decades away to younger taxpayers, but most financial experts actually say the best time to start saving for the future is in your early twenties. However, most taxpayers in their twenties are usually focused on school, their first serious jobs, or even starting a family. Fortunately, MSN Money recently published a helpful article on how to setup your first retirement plan, and I highly recommend anyone without a 401k or IRA check it out below.
Start early
Money you tuck away for retirement in your 20s has decades to compound. Make savings automatic, beginning with your first paycheck, and try to ramp up your contributions whenever you get a raise.
"Our goal for new employees just getting into the work force is we want to get them to save 10% of their gross wages as soon as possible," says Mark Berg, a certified financial planner and the president of Timothy Financial Counsel in Wheaton, Ill. Those who can't afford 10% right away can start smaller. "We try to target 4% to 5% initially and then as they get raises, we'll add a percent or two to the amount they are putting in," says Berg.
If your company has a waiting period before new employees are allowed to join the 401k plan, make note of that date and begin participating as soon as you are eligible.
Get a 401k match
An employer match is a powerful incentive to participate in a 401k. A company match of 50% of contributions up to 6% of pay for an employee earning $35,000 annually can boost that worker's retirement savings by $1,050 each year.
If your employer doesn't offer a 401k match, it's still worthwhile to invest in a 401k for the tax break. Young employees can contribute up to $16,500 to a 401k in 2010 and won't pay income taxes on the amount contributed until retirement.
Consider a Roth 401k
Some companies offer a choice between traditional and Roth 401k's. Traditional 401k deposits give you a tax break in the year you make the deposit, but income tax is due when the money is withdrawn. Roth 401k contributions are made with after-tax dollars, and withdrawals in retirement are tax-free.