Your 20s can feel like a whirlwind of new beginnings—launching your career, building independence, and maybe even paying off student loans. As overwhelming as it may seem, there’s one major move you don’t want to overlook: investing in your future. More specifically, saving for your retirement early on. The trick is figuring out how much to contribute to your 401(k) in your 20s without leaving yourself strapped for cash.
It might sound like something to worry about later, but starting now will pay off down the road. Here’s everything you need to know about contributing to your 401(k) in your 20s while balancing other types of savings and financial priorities.
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What is a 401(k), and why should you care?
A 401(k) is a retirement savings account offered by employers. You contribute a portion of your paycheck, and the money grows tax-deferred until you retire. Plus, some employers offer a match—meaning they’ll contribute extra cash to your account if you contribute, too. Free money? Yes, please!
The earlier you start saving, the more time your money has to grow, thanks to the magic of compound interest. Even small contributions in your 20s can snowball into a hefty retirement fund by the time you hit your 60s. But with rent, bills, and other goals to juggle comes the question, “What percentage should I contribute to my 401k in my 20s?”
How much should you contribute to your 401(k) in your 20s?
There’s no one-size-fits-all answer to this question. How much you should contribute to your 401(k) depends on several factors, including your income, financial goals, expenses, and other savings. Even so, what is the average 401(k) balance at age 20? The How America Saves 2024 report shows that, on average, young adults up to 25 have $7,351 in their 401(k). From 25 to 34, that amount typically grows exponentially, with an average balance of $37,557.
That said, here are some general guidelines to consider when it comes to contributing to your 401(k):
Aim for 10-15% of your income
“I generally recommend aiming for 10% to 15% of your gross income,” says Steven Kibbel, financial planner and chief editorial advisor at Gold IRA Companies. “However, I understand this isn't always feasible, especially when you're just starting your career.” If you can hit this target, you’ll be setting yourself up for a comfortable retirement. But if you’re juggling other financial priorities like student loans, starting at a lower percentage and gradually increasing it can still get you on track.
Start small, but increase over time
If contributing 10-15% feels out of reach right now, don’t sweat it. “Start with what you can afford, even if it's just 3% of your income,” Kibbel says. “Try bumping up your contribution rate by 1% or 2% each year.” As your salary increases, many employers even offer an auto-escalation feature that automatically increases your contribution rate annually. Remember, any amount you save is better than nothing, and small increases can make a big difference over time.
Take advantage of your employer’s match
If your employer offers a 401(k) match, you should absolutely take advantage of it. For example, if they offer a 4% match, try to contribute at least that much so you don’t leave free money on the table. In your 20s, this is especially crucial—those extra dollars can compound over decades and significantly boost your retirement savings.
Balance your 401(k) with other financial goals
“While your 401(k) should be a priority, it shouldn't be your only focus,” Kibbel says. Building an emergency fund with three to six months of living expenses, paying off high-interest debt, and saving for short-term goals like buying a car or traveling should also be part of your financial strategy in your 20s.
As for how much to put where, Kibbel suggests this approach: “First, contribute enough to your 401(k) to get any employer match—that's free money you don't want to miss out on,” he says. “Then, build up your emergency fund. Once those bases are covered, you can split your remaining savings between maxing out your 401(k) and investing in a regular brokerage account for non-retirement goals.”
Read this next: How to Build a Safety Net: Your Step-by-Step Guide
Should I max out my 401(k) in my 20s?
You might wonder if maxing out your 401(k) in your 20s is the best move. In 2024, the federal 401(k) contribution limit is $23,000. Maxing it out is an ambitious goal, but it’s not always necessary—or realistic—early in your career.
Instead, focus on contributing enough to get your employer’s match and working towards that 10-15% sweet spot. Maxing out your 401(k) might be something to aim for later when you’re earning more and have fewer competing financial priorities.
This might help you to decide: Should I Max Out My Roth IRA? When It's a Good Idea—and When It's Not
How to invest in your 401(k) in your 20s
By understanding how your employer facilitates the setup and management of your 401(k) account and the basic steps for choosing investments, you can start earning confidently.
1. Sign up through your employer
When you get a job that offers a 401(k) plan, your employer will provide you with the option to enroll. In many cases, companies will automatically sign you up and start deducting contributions from your paycheck unless you opt-out. They will also create the account for you, so you don’t have to worry about opening one yourself. Once you're enrolled, you'll be able to choose how much of your salary to contribute, typically as a percentage.
2. Choose your investment options
After enrolling, you’ll be given a menu of investment options, usually curated by the 401(k) plan administrator. The choices typically include a mix of mutual funds, index funds, and target-date funds. If you're new to investing, a target-date fund may be a great place to start. These funds automatically adjust their risk based on your retirement date—ideal for young investors with a long time horizon. If you prefer more control, you can create a personalized portfolio using a mix of stocks, bonds, and other asset classes.
3. Arrange the employer matching
One of the key benefits of a 401(k) is the potential for employer matching. This means your employer will match a portion of your contributions, often up to a certain percentage of your salary. For example, if your employer matches 50% of your contributions up to 6% of your salary, it’s essentially free money that you should take advantage of by contributing at least 6%.
4. Review and rebalance your portfolio
Once you’ve selected your investments, keep an eye on your portfolio and make adjustments as needed. Many 401(k) plans offer tools that allow you to rebalance your portfolio periodically to ensure it remains aligned with your long-term goals. As you age or as market conditions change, you may want to shift your portfolio to include more bonds and fewer stocks to reduce risk.
Maximizing your 401(k) contributions in your 20s
In your 20s, you have a long time horizon until retirement, which means you can afford to take on more risk for potentially higher rewards. “I typically advise young investors to focus on growth-oriented options,” Kibbel says. “These carry more risk, but they also offer the potential for higher returns over the long haul.”
This means that in your 20s, your portfolio can afford to be more aggressive. Consider investing a portion of your 401(k) in stocks, which have historically provided higher returns over the long run. A mix of domestic and international stocks, bonds, and other assets can help balance risk and reward, ensuring that you’re not overly reliant on any one type of investment.
As you get closer to retirement, you can gradually shift to a more conservative strategy by adding bonds and other low-risk investments. Many 401(k) plans offer target-date funds, which automatically adjust your investment mix as you approach retirement. These funds start with a higher allocation of stocks and shift to more conservative investments over time, making them a great hands-off option for young investors.
Bottom line
The earlier you start, the better. Every penny saved in your 20s will make a significant difference in your retirement days. Take advantage of the snowball effect and employer contributions to build your cushion for your late years while also balancing other financial priorities. Remember, you can always count on The Muse to navigate career and financial topics.
FAQs
How much should a 25-year-old have in a 401(k)?
While everyone’s financial situation is different, a good rule of thumb is aiming to have the equivalent of one year’s salary saved in your 401(k) by age 30. This number will vary depending on your income, expenses, and financial goals.
Should I max out my 401(k) in my 20s?
Maxing out your 401(k) can be a great goal, but it’s not always necessary in your 20s. Focus on contributing enough to get your employer’s match and gradually increase your contributions as your income grows.
How much should I contribute to my 401(k) at age 25?
At age 25, aim to contribute around 10-15% of your income to your 401(k). If that’s not feasible, try to at least contribute enough to take advantage of your employer’s match.