- Gen Z should start thinking about retirement sooner rather than later.
- Starting to save for retirement as soon as possible makes a big difference, if you’re able.
- Roth IRAs and 401(k)s are smart places to start saving and investing.
- Read more Personal Finance Insider coverage »
The oldest Gen Zers are just turning 24, so they have a long way to go before retirement. But that doesn’t mean they can’t get a head start.
1. Start saving while you’re young if you can
The sooner you’re able to start investing, the more your money can take advantage of compound interest, a principal where money grows based on interest earned, creating a snowball effect over the long term.
But it’s not just the math that makes starting early such a smart move.
Westlin says that aside from the opportunity of spending a long time in the market, starting to save as soon as you can builds better saving and investing habits that will add up over a lifetime. “It’s only going to open up flexibility for you down the road,” he says.
2. Consider a Roth IRA
Westlin says he recommends a Roth IRA to anyone just starting out because it’s very effective when you’re young.
Roth IRAs allow you to contribute money after taxes now and take out funds tax-free later in retirement. Not only does it mean you’ll keep more money in retirement, but it also means you won’t have to pay taxes on money that’s already grown, as you would with 401(k) plans and traditional IRAs.
“Along with the tax-free growth benefits, you can set up automatic deposits so that you can start to create a budget and get used to setting some of that money aside for future you,” Westlin says.
However, these accounts do have income and contribution limits. In 2021, single people earning less than $125,000 and couples earning less than $198,000 are eligible to contribute up to the full $6,000 limit for those under age 50. Roth IRAs can be opened at a number of banks and investment institutions, and require the person opening it to be at least 18 years old with taxable income.
3. Take advantage of your employer’s 401(k) plan if one is available
If you have a job with a 401(k) plan available, take advantage of it, Westlin says.
“This can be a really powerful choice because the contributions are going to be made directly from your paycheck,” he says. “It almost creates this forced savings, where if you start contributing right off the bat, you might just not even get accustomed to having that money available in your bank account.”
Another powerful feature is the 401(k) match, which is where an employer matches the amount you contribute towards your retirement up to a certain percentage of your income. That’s free money your employer is contributing towards your retirement, and it’s available (it might not be) that’s not to be passed up.
4. Know that if you can’t save right now, it’s OK
Knowing your financial boundaries is important. While saving as soon as possible is a great thing, it’s OK to wait, too, and put other financial priorities first.
“If you need to take care of some other shorter-term things, that’s OK. And maybe you start saving for retirement after you get a better handle on those things,” Westlin said.
“Maybe you have student loans, maybe you need to save up cash to have an emergency fund buffer. You might just be figuring out your cash flow and how to pay bills,” he continues. “It’s OK to take those baby steps first before starting to open all these retirement accounts and making contributions.”