Retirement planning in your 20s

Retirement may seem like a way off when you're in your 20s, but there are ways you can prepare.

Retirement may seem like a way off when you’re in your 20s. Perhaps you’re more focused on paying off your credit card, saving for a house deposit or paying back your student loan. But the truth is that it’s never too early to start thinking about your future and putting money away for your retirement years. Plus, starting a savings plan, and investing small amounts of money early on in life will mean you have to save less in the long run as you’ll benefit from compounding and investment growth. Here’s what to consider prioritising in your 20s to ensure you’re on track for a happy retirement.

Start regularly saving

The sooner you start saving, the better. Starting early means your money has longer to grow and benefit from compound interest. Think about what you want to save for - it could be a car, property or travelling - and what you need to save for i.e. an emergency fund.

Apply a budgeting rule to your spending like the 50-30-20 rule and you’ll still be able to enjoy yourself and save for things like holidays and property while also getting ahead in terms of saving for retirement.

Make sure you’re opted into your workplace scheme

Thanks to the introduction of Auto-Enrolment, if you’re employed in the UK, are at least 22 years old and earn more than £10,000, you’ll likely be opted into your workplace pension scheme. This means that pension contributions of 5% will be automatically taken from your qualifying annual salary and your employer will also have to make contributions of at least 3% on your behalf.

You’ll be automatically enrolled if you’re eligible with the option to opt out, but staying enrolled’s a great way to start saving for your future while also benefiting from employer contributions and tax relief. Depending on your salary and individual circumstances, you might want to contribute more than 5% of your qualifying salary to your workplace scheme. It’s worth checking with your employer if they offer to match your contributions as they might be willing to pay more into your pension if you increase your contributions.

Adjust your savings in line with pay rises

As you grow in your career, you’re bound to start getting promotions, pay rises and, if you’re lucky enough, maybe even annual bonuses. As your salary increases, make sure you’re also increasing the amount of money you’re saving whether that’s into an accessible place like an emergency fund or an ISA, or into your personal pension. You can still enjoy some of that pay rise, just make sure your contributions are proportionate to your increase in salary.

Think about investing

With longer to leave your money invested, your 20s are a great time to consider your investing options, whether that’s opening a Stocks and Shares ISA or buying premium bonds or exploring any of the other investing opportunities.

Only you can determine how much you have available to invest, just ensure you still have some spare cash in case of emergency, that you can access quickly.

But if you can confidently leave your money invested and let it ride out inflation and fluctuations in the stock market, when it comes to retirement, you’ll be benefiting from around 40 years of investment growth. If you aren’t sure where to start, MoneyHelper has a fantastic guide to investing for beginners.

Plus, you can listen to episode 17 of The Pension Confident Podcast and hear from a panel of expert financial guests including Consumer Editor at The Financial Times; Claer Barrett, Founder of Money to The Masses; Damien Fahy and Financial Expert and Author; Peter Komolafe, as they discuss the pros and cons of saving into pensions and ISAs.

Keep track of your pensions

If you’ve had more than one job, you might already have pensions from previous employers. Keeping track of old pensions, and combining them into one pension pot has a number of benefits. Firsty, you’ll reduce the amount you’re spending on annual fees across multiple pension pots. Plus, it’ll make preparing for retirement later in life easier as you won’t have to spend time going through paperwork from previous jobs and tracing pensions from decades earlier.

Avoid taking on unnecessary debt

While some debt‘s unavoidable, for example mortgage payments, where possible try to avoid spending beyond your means. If you’re able to stick to a budget, pay off any credit card bills or loans on time and avoid using schemes like Buy Now Pay Later when you’re younger, then you’ll keep a good credit score.

Later in life if you need to apply for a loan for a big purchase like a car, or want to get on the property ladder, you’ll be able to qualify for lower interest rates. Sticking to a budget and ensuring you have an emergency buffer is key to staying out of debt and in control of your immediate and future finances.

Consider life insurance

Just like starting a pension early, taking out insurance policies while you’re younger has its benefits. At a young age, you’re less likely to have health problems and you’re more likely to be able to lock in a low premium for a longer period of time. You can take out a life insurance policy from the age of 18, so considering it in your 20s is well worth doing, especially if you’re planning to buy a house or start a family later in life. LifeSearch offers different policies depending on your circumstances and if you aren’t sure you can compare quotes online or speak to an advisor over the phone.

Risk warning

As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.

Last edited: 06-04-2024

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