Early retirement planning is one of the smartest financial moves a young adult can make. Thanks to compound interest, it gives your money more time to grow. The earlier you start, the more secure your financial future can be.
Many young people think retirement planning is only for older adults. This isn’t true. Choosing the best retirement plans for young adults now can set you up for long-term success. Even small contributions now can turn into significant savings over time.
Why Start Retirement Planning Early?
Starting early gives your savings more time to grow. Compound interest allows your money to earn returns year after year, which can grow into a large nest egg over time.
Saving when you’re young means you can contribute smaller amounts while building significant savings. You also have more flexibility to take calculated risks. These risks can lead to higher rewards.
Retirement planning for young professionals also reduces financial stress. You won’t need to scramble to save later in life. Small, consistent contributions to a retirement account now can make a big difference in the future.
1. 401k Plans
A 401k plan is one of the best retirement plans for young professionals. Many employers offer it and has excellent benefits to help you build your savings over time. If you contribute enough, you can get the full employer match. You should avoid withdrawing money early to avoid penalties and missed growth.
This is how this retirement plan for young adults works:
- You contribute a percentage of your paycheck to your 401k account.
- Contributions are tax-deferred, meaning you now don’t pay taxes on that money.
- Your savings grow tax-free until you withdraw them in retirement.
These are some reasons to consider it:
- Many employers match a portion of your contributions.
- Contributions reduce your taxable income, which can save you money on taxes.
- You only pay taxes when you withdraw money during retirement.
- Contributions are taken directly from your paycheck.
- You can invest your 401k funds in stocks, bonds, or mutual funds.
2. 403b Plans
A 403b plan is a retirement savings option for people who work for:
- non-profits
- schools
- hospitals
- religious organizations
It’s similar to a 401k but designed for specific types of employees.
This is how this retirement plan for young adults works:
- You contribute a percentage of your income to the account.
- Contributions are tax-deferred, meaning you don’t pay taxes until you withdraw the money in retirement.
- Employers may also match part of your contributions, boosting your savings.
These are some reasons to consider it:
- Contributions lower your taxable income, saving you money now.
- Your savings grow tax-free until you make withdrawals in retirement.
- 403b plans often include options like mutual funds and annuities.
- You may qualify for additional catch-up contributions if you’ve worked for the same employer for 15 years or more.
- You can take advantage of compound growth.
- Contribute enough to get any available employer match.
3. Roth IRA
A Roth IRA is one of the best retirement plans for a young adult. It offers tax-free growth and withdrawals, making it an excellent choice for those starting their careers. However, your eligibility depends on your income. If you earn too much, you may not qualify, but you could pursue a Roth conversion to get its benefits.
This is how this retirement plan for young adults works:
- You contribute money that you’ve already paid taxes on.
- Your contributions grow tax-free over time.
- When you withdraw the money in retirement, you don’t pay taxes on the growth or your original contributions.
These are some reasons to consider it:
- Once you reach 59½ and have had the account for at least five years, all withdrawals are tax-free.
- You can withdraw your contributions (but not earnings) without penalties.
- Unlike Traditional IRAs, Roth IRAs don’t require you to withdraw money at a certain age.
- If you’re in a lower tax bracket now, paying taxes upfront can save you money later when your income (and tax rate) is higher.
4. Solo 401k Plans
A Solo 401k is a retirement plan for self-employed individuals or small business owners without employees. With more people pursuing their own businesses, it’s one of the best retirement plans for a young person. It gives you the same benefits as a traditional 401k but with higher contribution limits and more flexibility. You can contribute up to 25% of your net earnings as an employer.
This is how this retirement plan for young adults works:
- You act as both the employer and the employee.
- This allows you to contribute twice—once as an employee and again as an employer.
- Your contributions grow tax-deferred, which helps your savings grow faster.
These are some reasons to consider it:
- Contributions reduce your taxable income, saving you money on taxes now.
- Withdrawals in retirement are taxed, but you avoid taxes on the growth until then.
- Some Solo 401k plans also offer a Roth option, where contributions are taxed upfront, but withdrawals are tax-free.
- High contribution limits let you save more aggressively.
- You control the investments, giving you flexibility in how your money grows.
5. Thrift Savings Plan
A Thrift Savings Plan (TSP) is a retirement plan for federal employees and military members. It works similarly to a 401k but is specifically designed for government workers.
This is how this retirement plan for young adults works:
- You contribute a portion of your paycheck to the plan.
- Contributions can be pre-tax (Traditional TSP) or after-tax (Roth TSP).
- Your savings grow through investments in funds managed by the TSP program.
These are some reasons to consider it:
- TSPs have some of the lowest administrative fees among retirement plans. Low fees mean more of your money stays invested and grows over time.
- Federal employees under the Federal Employees Retirement System (FERS) can receive matching contributions. The government matches up to 5% of your salary if you contribute enough.
- With a Traditional TSP, you get tax-deferred growth and pay taxes later.
- With a Roth TSP, you pay taxes now, but withdrawals in retirement are tax-free.
- TSP funds include options like government securities, bonds, and stock indexes.
- You can choose funds based on your risk tolerance and retirement goals.
- If you leave federal service, you can roll over your TSP savings into an IRA or another retirement plan.
Start Early; Save More
It’s never too late to start your retirement planning. Work with our experts to help you start saving while you can. We take an in-depth comprehensive look at your finances to help you reach your retirement goals.
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Stewart Willis is the founder and president of Asset Preservation Wealth & Tax, a financial planning firm in Phoenix, Arizona. Investment advisory services offered through Foundations Investment Advisors, LLC, an SEC registered investment adviser.
A Roth conversion may not be suitable for your situation. The primary goal in converting retirement assets into a Roth IRA is to reduce the future tax liability on the distributions you take in retirement, or on the distributions of your beneficiaries. The information provided is to help you determine whether or not a Roth IRA conversion may be appropriate for your particular circumstances. Please review your retirement savings, tax, and legacy planning strategies with your legal/tax advisor to be sure a Roth IRA conversion fits into your planning strategies.
The commentary on this blog reflects the personal opinions, viewpoints and analyses of the author, Stewart Willis, providing such comments, and should not be regarded as a description of advisory services provided by Foundations Investment Advisors, LLC (“Foundations”), an SEC registered investment adviser or performance returns of any Foundations client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment, legal or tax advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Personal investment advice can only be rendered after the engagement of Foundations for services, execution of required documentation, including receipt of required disclosures. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Foundations manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Any statistical data or information obtained from or prepared by third party sources that Foundations deems reliable but in no way does Foundations guarantee the accuracy or completeness. Investments in securities involve the risk of loss. Any past performance is no guarantee of future results. Advisory services are only offered to clients or prospective clients where Foundations and its advisors are properly licensed or exempted. For more information, please go to https://adviserinfo.sec.gov and search by our firm name or by our CRD # 175083.
