Yes, Consider a 401(k) in Your 20s — Here’s Why

Anna-Louise Jackson
By Anna-Louise Jackson 
Updated
Edited by Robert Beaupre

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Even before the first paycheck from your first full-time job hits your bank account, it might be a good idea to plan for the day you’ll receive your final paycheck.

You may be thinking: I just began working. Do I really need to start thinking about retirement now?

The answer is yes. Most financial advisors say it's better to contribute some money to your company’s 401(k) — even if it’s a seemingly trivial amount each month — than to do nothing.

Don’t have a 401(k)? An individual retirement account (IRA) offers some of the same advantages, but you can open one without employer sponsorship.

Not convinced about the benefits of a 401(k)? Here are some reasons to consider contributing to one, or to another retirement savings vehicle, when you’re young.

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Why retirement savings matter

Trying to envision what life will be like some four decades down the road is next to impossible. There are so many unknowns, including your career trajectory, family situation and even the fate of Social Security.

But there is something easier to predict: the need to look out for yourself. Social Security probably still will exist in some form, but gone are the days when companies provided a guaranteed safety net to employees in the form of pensions. These still exist, but only in select industries.

Rather, it’s largely up to you to fund your retirement nest egg. You may strike it rich or win the lottery, but until then it’s a good idea to plan for a more mundane future. Time is on your side, and money you save today has decades to grow. That’s because investments compound over time, meaning you earn interest on both money you deposit, and interest it accrues.

» Are you saving enough for retirement? Use our retirement calculator to find out.

Retirement account options

Once you’re convinced it’s important to save for retirement as early as possible, it’s time to dive into some logistics. Here’s a priority list to consider for determining which accounts to use for your savings:

  1. Decide if you want to contribute the minimum to get your employer’s full match on your 401(k). This represents a return of up to 100% on your investment.

  2. Consider cutting costs with an IRA. Does an IRA offer lower fees than your employer-sponsored plan? If so, think about maxing out this contribution. The IRA contribution limit is $7,000 in 2024 ($8,000 if age 50 or older).

  3. Return to your 401(k) as needed. If you want to save more, you could max out your 401(k) contribution beyond your employer’s match. The maximum you can contribute is $23,000 in 2024 ($30,500 for those age 50 or older).

  4. If you want to invest more, you can put additional retirement savings in regular taxable accounts. This is basically any investing vehicle other than a 401(k) or an IRA.

A 401(k) plan can be an easy place to start, especially if your employer offers a match, because it offers tax breaks. These plans are also easy to fund; deductions can be taken directly from your paycheck. Matching programs often are structured as either a 1-for-1 match up to a certain amount or 50 cents per dollar to a specified level.

How much should you save? That's up to you and your investment goals. Some financial advisors suggest contributing 10% to 15% of your gross income.

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Choosing the right investments

Deciding how to invest your retirement savings can be exciting or overwhelming, depending on your perspective. The options are more limited within company-sponsored retirement plans than with an IRA.

Three of the most common assets you’ll encounter in a 401(k) plan are:

  • Index funds: A type of mutual fund that tracks a particular market index of individual stocks. (A mutual fund is a way to pool assets from multiple investors.) Here's more on how to invest in stocks this way.

  • Bonds: An investment in a government’s or company’s debt obligations

  • Target-date funds: A mutual fund that contains a mix of investments — stocks and bonds, namely — and that automatically rebalances over time.

There often are additional options within each type of asset, such as where the companies are located — U.S. or international, for example — or the size of the companies. Deciding on the right mix of these investments is largely personal. Your tolerance for risk, for example, might be far higher or lower than that of other investors. In general, investors who want to minimize risk may want to consider index funds that track broad benchmarks, such as the S&P 500, or target-date funds.

Target-date funds offer the most hands-off approach — they're structured around a future date, such as when you’ll retire — but they may carry higher fees. If you’re looking for a more hands-on strategy, you’ll largely be deciding between stocks and bonds. Bonds are considered less risky in the short term than stocks, but you’ll also earn a lower return.

Regardless of what route you take, keep an eye on fees. This may sound a bit like a broken record at this point, but the reason fees matter so much is they’ll cut into your future returns. And remember, all investments come with the risk of loss.

» See the deep dive: How to set up your 401(k)

What if the market changes or you leave your job?

All this talk of growing your investments may be exciting — until circumstances change. Markets will hit rough patches throughout your career, and you may lose your job if a recession hits or your company downsizes.

Your retirement savings are meant to be locked up for decades, and that means time is on your side. Investing carries inherent risks because asset prices can fluctuate wildly, but over the long term, the market has proved profitable. You can mitigate some of the risk by ensuring your portfolio is diversified — including a variety of assets.

If you switch jobs, the money in your 401(k) is something you take with you. Matching contributions may be subject to a vesting period, which varies from company to company. That means you may not be able to take all the money your employer contributed to your 401(k). If you brush up on that vesting deadline and decide you can stick it out a bit longer, you can take the full amount.

Once you’ve landed a new job, you’ll need to decide what to do with your 401(k). Your options often are to roll it over into an IRA or into your new employer’s plan. Again, the decision often will come down to fees. If you cash out your 401(k), in most cases, you will you incur a big tax penalty.

Retirement is one goal of many

Whether you envision working full time into your golden years or you aspire to join the FIRE movement, the steps you take now can help your dreams become reality. But retirement probably isn’t your only goal, and it’s important to be realistic about what else you’d like to save for, such as paying off debt, buying a home or supporting family.

You can still consider contributing as much as possible to get the company match for your 401(k). But one key is to take a measured approach, striking a balance between short-term and long-term goals.

» Next step: Read our full guide to retirement planning

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