The Best Way to Save for Retirement in Your 20s: A Financial Guide for Women
Your 20s are an exciting time filled with new beginnings—graduating from college, starting your career, and figuring out how to balance your finances. Amid the whirlwind of trying to get established, retirement might feel like a far-off concern. After all, you’ve got years (decades, even) before you retire, right? But starting to save for retirement in your 20s can have a profound impact on your financial future. The earlier you start, the better.
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In this blog post, we’ll explore the best ways for women in their 20s to save for retirement, so that you can lay a strong foundation for your financial security down the road. Whether you’re just beginning your career, have student loans, or are navigating other financial priorities, we’ll help you make the most of your current financial situation.
1. Start Saving Now—The Power of Compound Interest
The sooner you start saving for retirement, the more time your money has to grow. Even small contributions can make a big difference over time. The key to growing your savings is the power of compound interest. This is when your investments not only earn interest on the original amount you’ve saved but also on the interest that’s already been added.
For example, if you start saving $200 per month at age 25, with an average annual return of 7%, by the time you’re 65, you could have over $700,000. If you wait until you're 35 to start saving that same $200 per month, you'll end up with only $350,000. By starting in your 20s, you give your money more time to work for you.
The earlier you start, the less you need to save each month to reach your retirement goals, thanks to compound interest.
2. Take Advantage of Employer-Sponsored Retirement Plans
If your employer offers a retirement plan, like a 401(k) or 403(b), you should take full advantage of it. Contributing to an employer-sponsored plan is one of the most powerful ways to save for retirement, especially if your employer matches your contributions.
Employer Match: Free Money
Many employers offer a 401(k) match, where they’ll match a percentage of your contribution, essentially giving you "free money" toward your retirement. For example, if your employer offers a 100% match on the first 3% of your salary, make sure you contribute at least 3%. The match is essentially additional savings without any effort on your part.
Contribution Limits
In 2025, you can contribute up to $22,500 annually to your 401(k) if you’re under 50. If you're just starting out, contributing as much as you can may seem difficult, but at least aim to contribute enough to get the full match. Over time, you can increase your contributions as your salary grows or your expenses decrease.
3. Consider Contributing to an IRA
If your employer doesn’t offer a retirement plan, or if you want to supplement your 401(k), a Roth IRA or Traditional IRA are great options. IRAs provide more flexibility and can help you grow your retirement savings while giving you tax advantages.
Roth IRA: A Great Option for Younger Savers
A Roth IRA is often the best option for women in their 20s. Here’s why:
You contribute after-tax dollars, meaning you don’t get a tax deduction now, but your money grows tax-free.
You can withdraw your contributions (but not the earnings) at any time without penalty, which gives you more flexibility.
A Roth IRA is particularly useful if you're in a lower tax bracket now and expect your income to rise in the future. Plus, you can contribute up to $6,500 annually in 2025, and if you’re under the income limit, all your gains are tax-free when you withdraw the funds in retirement.
Traditional IRA: Immediate Tax Benefits
A Traditional IRA is another option to consider if you want to get a tax break right now. Contributions are tax-deductible, which means they can reduce your taxable income for the year. However, you’ll pay taxes when you withdraw the funds in retirement.
For 2025, you can contribute up to $6,500 to a Traditional IRA if you’re under 50. If you’re covered by a workplace retirement plan, the ability to deduct your contributions may phase out at higher income levels, so be sure to check the limits.
4. Maximize Your Tax-Advantaged Accounts
Whether you contribute to a 401(k) or an IRA, both of these retirement accounts are tax-advantaged, meaning they offer tax benefits that help your money grow more efficiently.
Contribute the Maximum
If you can afford to, aim to contribute the maximum amount allowed by law to your 401(k) or IRA. However, if this isn’t possible right away, start by contributing a small percentage of your income and gradually increase it as you earn more or your expenses decrease. Every little bit counts, and the more you contribute now, the better your future will look.
Catch-Up Contributions Later
Once you reach the age of 50, you can start making catch-up contributions to your 401(k) and IRA. This allows you to contribute more than the usual limits to make up for lost time. But the sooner you start saving, the less you’ll need to worry about this, and the more you can rely on compounding to grow your savings.
5. Automate Your Retirement Savings
One of the best ways to ensure that you consistently save for retirement is to automate your contributions. By setting up automatic transfers to your 401(k), IRA, or any other retirement accounts, you’ll make saving for retirement easier and more consistent. It’s an effective way to make sure you’re always contributing without having to think about it each month.
Auto-Increase Your Contributions
Many employers allow you to increase your 401(k) contributions automatically each year. You can set your contribution rate to increase by 1% annually. This small increase will add up over time, and since it happens automatically, you won’t feel the impact of the extra contributions.
6. Invest for Growth (But Be Mindful of Risk)
Once you’ve started contributing to your retirement accounts, the next step is to figure out how to invest your money. Most retirement accounts offer a range of investment options, including mutual funds, ETFs, and stocks.
Diversify Your Investments
It’s important to diversify your investments to minimize risk. A diversified portfolio typically includes:
Stocks and ETFs: These offer higher growth potential, making them a good choice for younger investors.
Bonds: These are safer but offer lower returns, and they can help balance out your portfolio.
Target-Date Funds: These funds automatically adjust the asset mix as you get closer to retirement, making them a good option for hands-off investors.
Since you’re in your 20s, you likely have more time to ride out the ups and downs of the market, so it may make sense to have a higher percentage of stocks in your portfolio. As you get older, you can gradually shift more of your investments into safer options like bonds.
Understand Your Risk Tolerance
Investing in stocks can be intimidating, but keep in mind that the stock market tends to rise over the long term. Since you’re in your 20s, you have time on your side to recover from market downturns. However, always make sure to assess your own comfort level with risk before making investment decisions.
7. Don’t Forget About Health Savings Accounts (HSAs)
If your employer offers a Health Savings Account (HSA) and you have a high-deductible health plan, you may want to consider using it to save for healthcare costs. HSAs offer several tax benefits:
Contributions are tax-deductible.
Earnings grow tax-free.
Withdrawals for qualified medical expenses are tax-free.
While HSAs are mainly used for medical expenses, they can also be a great way to save for retirement. If you don’t use the funds for healthcare costs now, you can invest them, and the balance will grow tax-free, giving you another source of retirement savings.
8. Be Mindful of Fees
High fees can eat away at your retirement savings, so it’s important to pay attention to the fees associated with your retirement accounts. Look for low-cost options, like index funds, which generally have lower fees compared to actively managed funds.
Over the course of decades, small fees can add up and significantly reduce your total retirement savings. By being mindful of fees and choosing low-cost investment options, you can maximize the growth of your retirement funds.
9. Revisit Your Retirement Plan Regularly
Your financial situation will change over time, so it’s important to revisit your retirement plan regularly. As you progress in your career, your salary may increase, or your financial priorities may shift. Make sure to adjust your contributions and investment strategy to reflect these changes.
Revisiting your plan at least once a year can help you stay on track and make sure you’re moving in the right direction toward your retirement goals.
10. Work with a Financial Planner
If you're not sure where to start or want personalized advice, consider working with a financial planner. A certified financial planner (CFP) can help you map out a retirement strategy that fits your lifestyle and financial goals. They can guide you through the process of saving for retirement, and help you optimize your investment decisions.
Conclusion
Your 20s are a great time to lay the foundation for a financially secure retirement. By starting early, taking advantage of tax-advantaged accounts like 401(k)s and IRAs, automating your savings, and investing wisely, you can set yourself up for a comfortable and stress-free retirement. The key is to start now, even if it’s with small contributions, and watch your money grow over time. Your future self will thank you!