Dear Penny: Am I Dreadfully Off Track on Retirement Savings at Age 23?

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Dear Penny,

I’m 23 years old and make a $55,000 salary. Each year I can make upward of a 20% bonus, and I’ve always gotten it. I started investing in a Roth IRA last year and have managed to stay on track to max it out each year. 

I have a decent emergency fund of three months’ expenses. My company doesn’t offer a 401(k) match, so I haven’t contributed to it at all. I’m worried I won’t have enough saved for retirement. Any advice?


Dear J.,

Relax. If you’re already maxing out your Roth IRA at 23, I think you’re on track to become a very wealthy retiree.

Financial planners often recommend saving between 15% to 20% of pre-tax income for retirement. The maximum Roth IRA contribution for someone under 50 is $6,000 in 2022. That means you’re falling a tad short of that recommendation, particularly when you factor in your bonus. Of course, the fact that you’re making Roth contributions — which are made with after-tax dollars but offer unlimited tax-free growth — makes the calculus a bit more complicated.

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But I’m not too worried about the exact percentage you’re saving. In your 20s, simply finding any money in your budget to invest can be extraordinarily difficult. That’s unfortunate, because a dollar invested in your 20s will go so much further than a dollar invested in your 40s or 50s, thanks to the power of compounding.

The habits you’re building right now are just as important as the amount you’re saving for retirement. If you can make investing a regular part of your monthly budget, you’ll build yourself a substantial nest egg. Living below your means and avoiding lifestyle inflation, i.e., the tendency to develop fancier tastes as your income rises, are also key. Make it a goal right now to allocate at least a bigger portion of future raises toward investing.

You have several options for investing more right now if that’s a high priority. But there are a few things to consider first.

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If you have high-interest debt, like credit cards or a private student loan, tackle that before you invest more money. The interest you’re paying is probably more than what you could expect to earn from the stock market in a typical year.

Since around 20% of your annual income comes in the form of a bonus, consider boosting your savings a bit. You say you’ve always gotten a bonus, but that may not always be the case. Plus, with fears of a recession looming, it’s wise to build your savings beyond the three-month emergency fund minimum. A bigger emergency fund protects the retirement money you’ve managed to save. By having a healthy amount stashed away in a bank, you reduce the risk that you’ll need to raid your retirement accounts in a pinch.

If you still want to invest more, making unmatched 401(k) contributions is probably the easiest way to do so. You won’t get free money out of your employer, of course. But you’ll still get some generous tax breaks. If you opt for a traditional 401(k) through your employer, your contributions will reduce your taxable income, or you can get tax-free withdrawals in retirement if you go with a Roth option. If you earn money from freelance or contract work, you could also look into opening a self-employed retirement plan for yourself.

Another option would be to max out contributions to a health savings account (HSA), provided that you’re eligible. Of course an HSA is first and foremost for medical expenses. But you can also invest that money if you don’t need it. That money can grow the same way it would in an IRA or 401(k). If you wait until age 65, you can withdraw the money for any purpose without penalty, though you’d still owe taxes on the withdrawals.

You’re still early in your career, so you probably have many jobs ahead of you. Next time you’re on the hunt for a job, you may want to make a 401(k) match a high priority and then contribute at least enough to get your company’s full match.

Maxing out your Roth IRA at 23 is a huge accomplishment. I have no doubt that you’ll be able to find ways to save even more over time.

Just don’t get so focused on retirement that you ignore your short- and medium-term goals. For most people, retirement is the ultimate financial milestone. But there are a lot of things you’ll want to accomplish in the next 40 years or so, as well. Saving for a down payment if you want to buy a home or go on a vacation are also important goals. You don’t need to put every extra cent into a retirement account. Because you’ve started saving early, you have the luxury to prioritize other goals.

Robin Hartill is a certified financial planner and a senior writer at The Penny Hoarder. Send your tricky money questions to [email protected].

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