4 Retirement Wealth-Building Strategies for Young People

Portrait of a young Asian woman sitting at home, doing some freelance job while taking care of her little baby boy.
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Despite the financial devastation caused by COVID-19 and current rapid inflation, there is some good news. According to a survey by the Transamerica Center for Retirement Studies, 67% of Generation Z workers are saving money via employer-sponsored retirement plans and/or outside the workplace. They also started at age 19 (the median age), which is earlier than any preceding generation.

So how can young savers make the most of their efforts? Here’s what to do now to ensure you have a healthy nest egg in retirement.

Get Started If You Haven’t Already

The most important strategy may be the most difficult for many, especially when retirement seems like such a far-off concept. Plus, you might not be earning much in the early stages of your career, so you may be tempted to put off saving for retirement until later.

However, you might not realize that the earlier you start, the less you’ll have to contribute to meet your goal. As you earn interest and dividends on your investments, those returns will compound. The more time your money has in the market, the bigger your portfolio can grow at the lowest cost.

In fact, you can start your own investment account as early as age 18, according to Avneet Kaur, CFO and co-founder at Core Family Office. “The younger you start saving, the faster you can retire,” she said.

Pay Yourself First

With typical budgeting, you risk running out of money before you get around to setting aside some savings. But if you pay yourself first, you ensure your savings remain on track and then spend whatever is left, according to Rick Nott, a senior wealth advisor at LourdMurray.

Are You Retirement Ready?

This concept essentially means treating yourself like your most important expense. When you get paid, transfer your savings before paying bills or making any purchases. Nott recommends putting retirement savings toward a tax-advantaged account such as a 401(k) or IRA. If you’re a high earner and max it out, then look to a taxable savings or brokerage account for the rest.

Don’t Panic

At several points along your investing journey, the market will drop. In some cases, severely. It can be jarring to experience a market downturn, especially as a novice investor. However, learning how to handle it is key to keeping your retirement on track.

As a young investor, you have plenty of time to ride out market fluctuations. Historically, the stock market returns 10% annually, on average. So the worst thing you can do is panic sell when the market is down and buy when prices are up. “The markets are cyclical,” Kaur explained. “True wealth is made during a recession — the ideal investor spends more money buying assets in a downturn.”

Take Advantage of a Roth IRA

One of the best tools at a young investor’s disposal is the Roth IRA. Rather than contributing pretax dollars and then paying taxes on distributions in retirement, contributions to a Roth are made with after-tax dollars. “After you pay tax on your money, contributing it to a Roth IRA allows you to enjoy tax-free growth forever,” Nott said. 

This strategy can be particularly beneficial if you expect to be in a higher tax bracket in retirement, or if you have high-growth investments that would otherwise likely result in a large tax bill when sold.

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