Avoid these common retirement planning mistakes when you are in your 20s and retirement can be more comfortable.

1. Putting Off Retirement Saving

Your greatest advantage for retirement savings when you’re in your 20s is time. You may think you have at least 40 years to grow your retirement nest egg before you’re ready to retire, but consider that you may be forced to retire earlier because of illness or you may retire later if you love your work. Every minute – and every dollar – counts. You might think you may not have much money right now to invest, but if you start saving even a small amount now, you won’t need to contribute as much later to your retirement savings. Time and compound interest will do most of the work.

Compound interest is “interest on interest,” the interest you earn both on your principal and on the interest you already earned, increasing the principal and earning even more interest. The longer the time for compounding, the more money you will have saved and earned for retirement. According to the investment company Vanguard, if you start saving $10,000 a year when you are 25 for 15 years, by the time you are 65 you will have $1,058,912 saved toward retirement, assuming a 6% annual return. If you wait until you are 35 and save $10,000 each year for 30 years, when you are 65 you will have only $838,019. An extra 10 years of compounded interest in the beginning makes a big difference in the end.

Waiting until you are older to begin saving for retirement will require a significantly larger monthly investment to reach the same goal

2. Saving Money Without a Retirement Account

Saving money for retirement requires a long-term financial strategy. You want to find the most advantageous means of saving. IRAs (individual retirement accounts) are investment accounts specifically designed to maximize your retirement savings through tax benefits and investment options.

You can open an IRA account on your own at any time. There are two types of IRAs: traditional and Roth. One difference is how they are funded and when the money is taxed. You fund a traditional IRA with pretax money, meaning you get a current tax deduction for those contributions. However, when you withdraw those funds at retirement, they are fully taxable at whatever your federal tax bracket is at that time. Roth IRAs are funded with after-tax money, meaning you have already paid tax on that money. When you withdraw from your Roth at retirement, both the contributions and the earning are completely free of federal tax. With either type of IRA account, you can control your investment even when you change jobs.

Many private employers offer a 401(k) retirement plan. You can contribute pretax or after-tax money through payroll to fund this account, and your employer may offer to match your funds. If you change jobs, you can roll over your 401(k) into your IRA or a 401(k) with your new employer. There is no rule against having both an IRA and a 401(k). The IRS limits the amount of money you can contribute to each type of account annually.

3. Missing Out on Employer Matching Funds

If your employer offers a 401(k) matching program, lucky you! That means your company will contribute money to your retirement savings based on a portion of what you save yourself. You select the portion of each paycheck you want directly deposited into your 401(k). Your employer will match your contribution up to a certain percentage. For example, if you choose to contribute 6% of each paycheck, your employer might match up to 3%. Many employers have a requirement that you work for the company a certain amount of time before you qualify for their matching funds.

Receiving employer matching funds is like getting free money. At a salary of $50,000, an employer match of 3% per year could mean a contribution of an extra $45,000 into your retirement savings over the course of a 30-year career. If you change jobs later in your career, you can roll over that money into your 401(k) with your new employer. Those employer matching funds remain part of your retirement savings, contributing to the amount of compounded interest you earn and helping you grow your nest egg even faster.

4. Taking a Hit-or-Miss Approach to Investing

You can afford to invest your retirement account more aggressively when you are young because you’ll still have time to recover from a loss. But adopting an investment strategy that involves timing the market based on expected price changes, picking individual stocks, or listening to random investment advice is not a good idea. Chasing the next big stock or investment trend is risky, and most people lose more than they gain with this approach. The best way to effectively grow your retirement account is through a diversified long-term investment strategy. Consider consulting a financial advisor who can help you understand your risk profile (how aggressive/conservative your investments will be) and develop a long-term plan for investing your retirement savings.

5. Withdrawing Retirement Funds for Other Uses

If you start saving for retirement in your 20s, by the time you are ready to buy your first home, your retirement account could be substantial. It will be tempting to borrow from your retirement savings rather than starting a separate savings account to buy a house. Keep in mind your long-term goal for that retirement savings, which is generally thought of as your way of replacing your earnings during your retirement. Borrowing money from your 401(k) could set you up to pay taxes on that money plus an additional 10% early withdrawal fee. First-time homebuyers can borrow up to $10,000 from their IRA without paying a penalty, but there are still potential tax liabilities depending on what kind of IRA it is and/or how long you’ve had it.

The biggest drawback to withdrawing money from your retirement account for something other than your retirement is the time you will lose on your investment earnings. Even if you pay the money back, you will never catch up to the amount of savings you would have had if you left the money to grow in your retirement account because of the aforementioned compounding of interest – assuming the market does not rise or fall dramatically. You will be better off finding another way to buy a house or make any other big purchases.

Retirement savings might seem confusing, but this is the right time to learn. You have a bright future that could include retiring early if you make smart money decisions now. By thinking ahead and sidestepping these common pitfalls, you can save for your retirement with confidence. Contact your financial institution for guidance with your retirement planning strategy.

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