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Most financial planners say that the sooner you start saving for retirement, the better. If people start saving for retirement at a younger age and invest in a diversified portfolio of stocks and bonds, their money will have more time to grow for the future. The longer your money is invested, the more it can grow.
But is it ever “too soon” to save for retirement? If you’re 20 years old or so, and still in school or just getting started in your career, 20 years old could actually be too early to save for retirement. Yes, it’s always good to save for retirement — but if you’re young and starting with $0 in your savings account, you might want to prioritize some other financial goals first.
Let’s look at a few reasons why 20-year-olds might want to wait a few years before opening an IRA, 401(k), or other retirement savings account.
1. Finish your education first
Some 20-year-olds might already be working full-time and starting careers. But if you’re still in college or finishing a professional training program, you should probably put your full time effort into finishing your education.
Earning professional credentials to get started in a high-paying career is often the most important investment you’ll ever make. Investing in your future earning power will give you the healthy cash flow that makes all of your future 401(k) contributions possible.
Don’t stress about saving for retirement if you’ve not really launched your career yet. Stay in school, get your degree, finish your apprenticeship, earn your certificate, and boost your future income first. Then you can start thinking about savvy moves for how to invest that money for retirement and other goals.
2. Build up your emergency savings
Most 20-year-olds don’t have a lot of money in the bank. In fact, a recent CFA Institute survey found that the typical Gen Z investor has only $4,000 of investments. Some might even have credit card debt.
If you don’t already have a few months’ worth of emergency expenses in a high-yield savings account, that’s OK — but don’t prioritize retirement savings until you’ve had a chance to pay off credit card debt and build up some emergency cash.
As a 20-year-old, you probably aren’t a homeowner or in a long-term relationship or otherwise attached to a lot of the aspects of life that older, more financially-secure people might have. You need some “short-term” money in case your life changes.
What if you get laid off from your job? What if you want to move across the country to pursue a job in a new city? What if your car breaks down? If too much of your monthly paycheck is getting locked up in a 401(k) or traditional IRA, this can make it harder for you to be financially flexible.
Even if you have to delay starting to save for retirement for a few more years, 20-year-olds (and even many 25-year-olds) might be better off putting cash in the bank.
3. Get established in your career
As a 20-year-old, and even throughout the rest of your 20s, your biggest financial priority should not be investing — and definitely not trying to pick risky meme stocks. Instead, focus on investing in your career.
Bring a great attitude to work every day and look for ways to add value and learn new things. Join professional development groups and community organizations — volunteer, get involved in causes that you care about, and meet people to build your network. Start a side hustle to make extra money and learn new skills.
Building relationships with people who can help your career — and become lifelong friends and supportive colleagues — is a better use of your time right now, at age 20, than worrying about building a stock portfolio for retirement.
Bottom line
If you’re 20 years old today, your whole life is ahead of you. Your journey is just getting started. Don’t feel pressured to start making a lot of money and saving for retirement right away — most 20-year-olds do not have much money saved, especially if they’re still in school. Your biggest career earnings and most lucrative years of investing and building wealth are still in the future, and that’s fine.
If you happen to have a full-time job at 20 years old that offers an employer 401(k) match, go ahead and save just enough to get that matching amount. But beyond that, your extra cash should go to emergency savings. And your extra time and energy should go toward improving your professional skills and building your career.
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