Here's What Happens When You Start Saving for Retirement in Your 20s

Being a 20-something isn't always easy. At this stage of life, you may be facing a host of bills while only earning an entry-level salary. And you may be more focused on paying off your credit cards than socking money away for retirement savings purposes.

But the reality is that your 20s are an important time to start saving and investing for retirement. And if you push yourself to start funding your IRA or 401(k) plan in your 20s, you might end up in a great financial position once your 60s roll around.

Why starting early is key

A lot of people don't really begin to prioritize their retirement savings until their 30s or 40s -- or sometimes, even later. But you should know that the sooner you start investing your money for retirement, the more opportunity you'll have to grow it. 

Over the past 50 years, the stock market has rewarded long-term investors with an average annual 10% return before inflation, as measured by the S&P 500 index. So let's say you start contributing $200 a month to your retirement plan at age 25 with the goal of retiring at age 65. If your portfolio delivers that same average annual 10% return, in 40 years, you'll be sitting on about $1.062 million. A sum of money like that could make for a very comfortable retirement.

But watch what happens when you wait 10 years to start funding your retirement plan. At that point, if you only manage to save and invest $200 a month over 30 years at that same 10% return, you'll be looking at a final balance of about $395,000. That's a world of difference.

It's also worth pointing out that saving $200 a month for those extra 10 years means parting with an additional $24,000. But in exchange, you're looking at a gain in your IRA or 401(k) that's $667,000 higher. When you think about it that way, it's pretty easy to make the case to start saving for retirement in your 20s.

How to pull off retirement savings in your 20s

At this point, you may (hopefully) be convinced that starting to save for retirement in your 20s is a smart bet. But the question is, how do you pull that off on a minimal salary?

First, take a look at your expenses and see if there are any you can cut back on. The example above illustrates how far you can get with a $200 monthly contribution. So perhaps there are expenses you can slash to the tune of $200 a month. Skipping one restaurant meal a week might even do the trick, depending on your dining habits and how expensive restaurant food is where you live. 

Another option, of course, is to turn to the gig economy for an income boost. If you're able to side hustle your way into an extra $200 a month, that money can go straight into your retirement plan so you're able to invest it from a young age. 

Many people don't save for retirement in their 20s. Rather, they wait until their incomes are higher and their financial lives are a bit more stable. 

But if you miss out on the opportunity to start saving in your 20s, you might sorely regret it. So instead, think about the different things you can do to make modest but meaningful monthly contributions to your retirement plan.