When you're in your mid-20s, retirement is probably the furthest thing from your mind. At that stage of life, your financial priorities may be to pay off nagging credit card debt and start socking money away for a down payment on a home.
But if you're able to carve out a chunk of money for your IRA at 25, it could go a long way toward building a solid retirement nest egg. In fact, you may be surprised at what a difference a $5,000 IRA contribution at age 25 might make.
When you give your money many years to grow
The money you have in your IRA isn't supposed to just sit in cash. If you go that route, it won't grow very much. Rather, it's a good idea to invest your IRA so your money gets to grow at a more rapid pace.
One great thing about saving for retirement in an IRA is that you can load up on a diverse mix of stocks. With a 401(k) plan, you're generally not able to hand-pick stocks for your retirement savings. Rather, you're limited to investing in different funds that may or may not align with your investment strategy.
Meanwhile, let's say you load your IRA with 30 or so stocks across a range of market segments. Or, let's say you keep things even simpler and invest in an S&P 500 ETF, which will effectively give you exposure to the broad stock market without having to invest in 500 different companies individually.
Over the past 50 years, the stock market, as measured by the S&P 500's performance, has rewarded investors with an average annual 10% return before inflation. That number accounts for both good years and, well, not so great ones.
If you were to put $5,000 into your IRA at age 25 and leave that money alone until age 65 (which is a common age to retire at), over that 40-year period, your balance would grow to about $226,000, assuming a 10% average annual return.
Now you may want to save more than that for retirement. But even so, a single and relatively modest investment at age 25 could leave you with an astounding amount of money in time for your senior years. And that's why it pays to do what you can to fund your IRA when you're young, even if it means having to cut your spending in fun categories, like entertainment and travel.
A sacrifice worth making
Carving out $5,000 to put in an IRA at age 25 isn't easy. Heck, it may not even be an easy thing to do at age 35, when you might, at least ideally, be earning more money than in your mid-20s.
But even so, a single investment in stocks could leave you very wealthy in time for retirement if you give your money a solid four decades to grow. So it's worth making that sacrifice if you can.
You may need to live with a roommate, drive a clunker of a car, and spend some of your evenings working a side hustle to come up with $5,000 for your IRA at age 25. But your 65-year-old self might thank you profusely for making that effort.
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FAQs
If you were to put $5,000 into your IRA at age 25 and leave that money alone until age 65 (which is a common age to retire at), over that 40-year period, your balance would grow to about $226,000, assuming a 10% average annual return. Now you may want to save more than that for retirement.
How much should a 25 year old put in a Roth IRA? ›
If you're 25, you should aim to max out your IRA every year. For 2024, a 25-year-old can contribute up to $7,000 to an IRA. It might seem unnecessary to save for retirement at such a young age, but giving your money time to grow is one of the best things you can do for your future self.
How much should I contribute to retirement at 25? ›
So, we did the math and found that most people will need to generate about 45% of their retirement income (before taxes) from savings. Based on our estimates, saving 15% each year from age 25 to 67 should get you there.
Is 27 too late to start a Roth IRA? ›
There is no age limit to open a Roth IRA, but there are income and contribution limits that investors should be aware of before funding one.
How much will my Roth IRA grow in 20 years? ›
If you contribute 5,000 dollars per year to a Roth IRA and earn an average annual return of 10 percent, your account balance will be worth a figure in the region of 250,000 dollars after 20 years.
What kind of IRA should a 25 year old have? ›
A general guideline is that if you think your tax bracket will be higher when you retire than it is today, you may want to consider a Roth IRA—especially if you're younger and have yet to reach your peak earning years.
What percentage should a 25 year old put in 401k? ›
The amount of money you should contribute to your 401(k) each year depends on your specific financial situation and goals. Ideally, you should contribute at least 10% to 15% of your pay towards retirement accounts, including what your employer contributes on your behalf, starting at age 25, Adams said.
Is 25 too late to start saving for retirement? ›
Key Takeaways. Starting retirement savings when you are in your mid- to late 20s and early 30s will help you use the power of compounding. Retirement savings accounts like 401(k)s and individual retirement accounts (IRAs) provide tax benefits that can help you save more.
Is 25 too late for 401k? ›
Most retirement advice is centered around early investing starting in your 20s, and if you're a late bloomer, starting in your 30s.
Is 25 late to start saving for retirement? ›
It is never too late to start saving money you will use in retirement. However, the older you get, the more constraints, like wanting to retire, or required minimum distributions (RMDs), will limit your options. The good news is, many people have much more time than they think.
Let's say you open a Roth IRA and contribute the maximum amount each year. If the base contribution limit remains at $7,000 per year, you'd amass over $100,000 (assuming a 8.77% annual growth rate) after 10 years. After 30 years, you would accumulate over $900,000.
What is the 5 year rule for Roth IRA? ›
The Roth IRA five-year rule says you cannot withdraw earnings tax-free until it's been at least five years since you first contributed to a Roth IRA account. This five-year rule applies to everyone who contributes to a Roth IRA, whether they're 59 ½ or 105 years old.
How long does it take to become a millionaire with a Roth IRA? ›
Long-time personal finance columnist Scott Burns writes that by working for four summers starting at age 16, putting the money in a Roth IRA, investing it wisely, and waiting until age 67, it's simple to become a millionaire. 1 That's the 51-year plan. But what if you're not that patient—or that young?
Is 1 million enough to retire? ›
In more than 20 U.S. states, a million-dollar nest egg can cover retirees' living expenses for at least 20 years, a new analysis shows. It's worth noting that most Americans are nowhere near having that much money socked away.
Is it smart to max out Roth IRA every year? ›
You don't get an immediate tax break for Roth contributions, but your investments grow without taxes and your withdrawals can be tax free. Maxing out your Roth IRA in just one year can result in a six-figure account value over time.
Should I open a Roth IRA at 25? ›
Starting to invest when you're young could give your money more time to potentially grow, thanks to compound interest. It may also be advantageous to start contributing to a Roth IRA while your taxable income is relatively low. As you get older your income might prevent you from making contributions.
How much should I put in my Roth IRA monthly? ›
Maxing out your IRA contributions is generally considered a good approach. So, assuming you are eligible to make the maximum contribution to your IRA, you can contribute $500/mo. if you're 49 years old or younger, or $583/mo. if you're 50 or older.
How much can a 26 year old contribute to a Roth IRA? ›
Roth IRA contributions are made on an after-tax basis.
The maximum total annual contribution for all your IRAs combined is: Tax Year 2023 - $6,500 if you're under age 50 / $7,500 if you're age 50 or older. Tax Year 2024 - $7,000 if you're under age 50 / $8,000 if you're age 50 or older.
