Even as we try to improve our starting at a young age, retirement saving is often the last thing on young adults’ minds. A 2015 Forbes study found that millennials were less likely than their Gen X and Baby Boomer counterparts to participate in a 401(k) plan. Young women especially should start saving for retirement earlier—a 2015 Pew Research study showed that only 53% of working-age women have started saving for retirement versus 63% of working-age men.
Getting started as soon as possible means that your money has time to grow in whatever retirement plan you choose, which will allow you to be better able to retire comfortably and at an age you desire. Below are some steps to allow you to do just that, whether you’re just starting your career or are a few jobs in.
Take advantage of company matching.
Some companies offer “matching contributions” for retirement plans. (The most common kind of retirement plan is a 401(k)—a tax-deferred salary savings plan to which employees can contribute a percentage from their salaries pre-tax.) This means that for every dollar you put into your plan, the company will add a certain percentage. These additions are essentially “free” money, so if your company matches and you’re able to, you should take full advantage by contributing the maximum amount.
Just how much of a difference can matching make? Forbes estimated that a 22 year-old who earns a $40,000 salary and contributes 10% of it to a 401(k) plan with 3% match would end up saving more than $1 million by the age of 65. If this employee waited until age 30 to start saving, she would end up with only about $617,000.
Factors like a lower salary, not knowing exactly how much to save, and school debt may make starting a retirement fund seem daunting for an entry-level employee, but every little bit counts. You don’t have to set the whole 10% of your earnings away either. You can always start with smaller amount, with the intention of continually raising the percentage per pay increase or after hitting certain savings goals.
Switch your plan when you switch jobs.
When you change jobs, you have the option of leaving your retirement savings in your previous employer’s plan. It may be the easiest option, but it’s not a great one—even though the money may have a chance to continue to grow, you will no longer be able to contribute and will have fewer investment options. Make sure to always ask the new human resources department to put you in contact with their retirement plan account representative. The new custodian can discuss the benefits of the new plan as well as help you figure out how much to contribute, what types of funds to contribute, and fill out the necessary paperwork.
Know your alternatives.
One may also invest in an IRA, or individual retirement account. There are two general types: Roth IRAs, which allow tax-free withdrawal at retirement, and traditional IRAs, which let you deduct your contributions from taxable income. In short: traditional IRAs allow you to avoid taxes when you put in money; Roth IRA allows you to avoid taxes when you take it out in retirement.
If you’re choosing between these two options, there are a few more factors to consider. Anyone under 70 who has earned an income may contribute to a traditional IRA, while there’s no age restriction for who can contribute to a Roth IRA. Similar rules apply to withdrawal. Other differences include tax treatment and income limits.
Get professional advice.
While IRAs are popular among those whose employers don’t offer retirement plans, investors sometimes also recommend those changing jobs to roll old plans over to an IRA for more flexibility and control than the new employers’ plans might provide. We lay out a few more details on 401(k) matching and the two types of IRAs in this article, but your best bet would be to weigh all your options with a financial or tax advisor.