For newly employed 20-somethings, there are lots of exciting but potentially overwhelming financial considerations: renting in a new city, paying off student loans, and managing a steady paycheck. Young adults may not be thinking about how to save for retirement in their 20s—but saving early for retirement may be one of the best ways to maximize funds.

Saving for retirement early vs. later is crucial because a long timeline lets investors take advantage of benefits like compound interest—earning interest on interest over time, which can help money grow exponentially—and the ability to make more aggressive investments that could garner greater returns. 

“We advise people that if you're young, you have a long time horizon in your retirement account and you should be taking risks,” says John DeYonker, Titan head of investor relations.

Most Americans aim to retire around age 65—how much money an investor needs to retire by that age depends on lots of individual factors, including their lifestyle. A retirement budget is informed by one’s standard of living, and experts say most people will need about 80% of pre-retirement income once they stop working.

For those wondering how much to save for retirement in their 20s, here are four things to consider.

1. Does your employer offer a 401(k), and do they match?

Many employers offer a 401(k) account, which is designed to encourage retirement savings. The money is collected before taxes are taken out, and those pretax funds are automatically deposited into the 401(k) account. That means investors may lower their taxable income now, and those funds can grow, compounding over time—a lot of time, given a 20-something’s long time horizon. Investors won’t pay any taxes on this money until it’s withdrawn.

Some employers also offer a 401(k) match, contributing extra money up to a certain percentage of the worker’s deposits. DeYonker calls this a no-brainer. “I tell people all the time: If you're not contributing in your 401(k) up to your percentage max [for the employer match, you’re missing out on] free money,” he says. “That's a 100% return.”

2. Are you eligible to open a Roth IRA?

Some employers may not offer 401(k) plans, but there are several other tax-advantaged accounts investors can set up instead of, or in addition to, a 401(k). These include a Roth IRA, a type of retirement savings account that lets investors deposit money after they’ve paid income taxes on it.

That post-tax depositing works the opposite way of a 401(k), but a Roth IRA offers its own tax advantages: When investors withdraw their money in retirement, they won’t pay taxes on that amount, including any gains earned. Roth IRA withdrawals are tax-free and penalty-free when the account holder is at least 59 ½ and has had the account for at least five years. (There are a handful of exceptional circumstances in which an investor can make an early IRA withdrawal without penalty, such as buying a first home.)

“It’s a way for the government to get people to save money for retirement,” DeYonker says. “They give this tax-advantaged status to these accounts, which you really don't get anywhere else.”

This option is limited by income, however. In 2021, single taxpayers who have an adjusted gross income of less than $125,000 can contribute a max of $6,000, according to IRS rules, while married couples filing jointly can contribute a max of $12,000, provided their earnings don't exceed $198,000.

3. Do you have an emergency fund?

Once funds are earmarked for retirement, investors typically leave them alone if at all possible—both because they’ll need that money in the future and because tax-advantaged retirement accounts typically charge penalties for early withdrawal.

“Liquidity is something people need to think about,” says DeYonker. “You should always have a good sense that the money you’re putting away is technically gone until you’re 60-something years old.”

Unexpected expenses can throw those plans off track if investors don’t have an emergency fund to assist with surprises like health-care costs, car repairs, or the loss of a job. To start building an emergency fund, investors may opt to automatically send a portion of their paychecks into a separate account such as a high-yield savings account to earn interest that compounds over time. This amount can be increased if the investor receives a raise, and they may choose to bank a part of any bonuses, inheritances, or other windfalls.

4. Do you have extra money to invest in the market?

Investing in stocks

may lead to gains, especially over the long term. What this looks like depends on the individual, as investors vary in their tolerance for risk, time horizon for retirement, and desired level of involvement with the portfolio.

Investors can open accounts through a brokerage and make their own investments, or receive guidance from an investment team or robo-advisor. They can buy and sell securities, including stocks, which are shares of ownership in a company; mutual funds, which are professionally managed and include a variety of securities; exchange-traded funds (ETFs), which track a specific index, sector, or commodity; and bonds, which represent loans to a borrower like a corporation or a local or federal government.

Though results are never guaranteed, smart stock investments can generate passive income without a lot of day-to-day involvement. They may also help investors stay ahead of inflation: The average stock market return was 13.9% annually over the last 10 years, for example, while annual inflation rates have been between 1% and 3% over the same period.

For investors in their 20s, an investment advisor may recommend a more aggressive strategy that may be more risky but could reap larger returns.

“The longer the time horizon, the more we might recommend you invest in riskier portfolios,” DeYonker says. “They're not necessarily riskier per se, but they are more volatile. To outperform over the long run, you need to be able to stomach some sort of volatility in the short run.”

The bottom line

There’s no single answer to questions like how much to save a month for retirement in your 20s or how much to contribute to a 401(k) in your 20s. Investors must consider their personal circumstances, including when they plan to retire and what they want that phase of life to look like. ‍

Tools like retirement calculators

can help provide a broad guideline as investors in their 20s consider their plans. A wealth manager or management team can also assist in creating a detailed financial plan, including shoring up emergency funds, maximizing tax-advantaged accounts, investing in a diversified portfolio, and more.