Some people are lucky enough to be financially savvy in their 20s. But when you’re new to adulthood, it’s easy enough to fall victim to financial blunders that have the potential to hurt you later on. With that in mind, here are three investment mistakes you’ll really want to avoid in your 20s, as they could seriously come back to bite you during your 60s.
1. Not snagging your full employer match in your 401(k)
You may not be so motivated to contribute to your company’s 401(k) plan when you’re in your 20s. After all, at that stage of life, retirement might seem like a fantasy.
But if you don’t put in enough money to claim your full employer match, you’ll be giving up free money for your future self. And that’s not a good thing.
Remember, the money in your 401(k) usually doesn’t just sit in cash — or at least it shouldn’t. Rather, you can invest that money so it grows over time.
Let’s say you could’ve had a total of $15,000 in employer contributions added to your 401(k) by age 30, only you passed up that money instead. Over the past 50 years, the stock market has averaged an annual 10% return, which is the return you might’ve gotten in your 401(k) with those employer contributions.
Meanwhile, $15,000 invested from ages 30 to 60 at a yearly 10% return would otherwise grow into about $262,000. That could be enough to pay for several years of living expenses in retirement.
2. Not going heavy on stocks when you’re young
Some people start investing during their 20s. But it’s not unheard of for 20-somethings to shy away from stocks because they’re afraid of taking losses.
It’s true that stock values can be volatile. But if you play it too safe in your portfolio, you may not end up with enough retirement income to live comfortably.
Let’s say you invest your IRA conservatively over a 40-year period where it generates an average annual 5% return. If you contribute $200 a month over 40 years, you’ll end up with a balance of about $290,000.
Now, that’s certainly a respectable sum of money. But if you were to snag a 10% return in your portfolio instead, you’d end up with $1.06 million.
3. Tapping your portfolio for cash instead of leaving it alone
You might contribute to an IRA or 401(k) in your 20s, only to raid that account to cover an unplanned bill. But doing so could hurt you in two ways.
First, IRA or 401(k) withdrawals taken before age 59 1/2 are generally subject to a 10% early withdrawal penalty. But more so than that, again, you lose out on the opportunity to grow the sum you remove. So even if it’s just a $1,000 withdrawal, if you remove that sum at age 27 and don’t retire until 67, you’ll be short $45,000 in retirement income if you’d normally get a 10% return on your investments.
To avoid having to tap your IRA or 401(k) in a pinch, build yourself an emergency fund. Aim for a minimum of three months’ worth of essential living expenses in the bank, so you’re not forced to raid your retirement savings to cope with a bout of unemployment.
The financial moves you make in your 20s could have a strong impact on your retirement — for better or for worse. Do your best to avoid these mistakes so you don’t wind up with a world of regrets by the time your 60s roll around.