Conventional financial wisdom tells us that planning for retirement in your 20s is better than waiting until your 30s or 40s.

But new research from the National Bureau of Economic Research (NBER) suggests that isn’t a one-size-fits-all solution.

The report focuses on a life cycle model for young adults to determine optimal retirement saving methods. It specifically looks at 401(k) plans with automatic enrollment and employer matching — and how that practice may not be the best option for college-educated workers in their 20s.

The life cycle model in the report is centered on the idea that “saving for retirement when [your] income is temporarily low could be suboptimal.”

“We find that with a plausible wage profile for college-educated workers, retirement saving does not begin until the late 30s or early 40s, even with standard employer matching,” the report reads.

The report is part of the NBER Working Paper Series and is authored by Jason Scott of J S Consulting, John B. Shoven and John G. Watson of Stanford University and Sita Slavov of the Schar School of Policy and Government at George Mason University.

Best Time to Start Saving Depends on Circumstances

Retirement planning is circumstantial. The study shows that wages grow more rapidly with age for college-educated workers compared to those with only a high school degree.

In this regard, researchers suggest that waiting until your 30s or 40s to begin saving for retirement is justifiable and potentially better for college-educated young adults making low wages at the start of their careers.

Alternatively, workers with only high school degrees typically begin saving for retirement in their 20s, regardless of employer match and a small rise in inflation-adjusted earnings.

The NBER report uses a life cycle model of a college-educated millennial born in 1995 who begins working at age 25 and retires at 67. It accounts for 2 percent inflation, standard Social Security benefits and assumes a 27 percent federal and state tax rate.

It also factors in the effects of an automatically enrolled 401(k) plan, including plans with generous employer matching.

According to the life cycle model in the report, earnings at age 25 are typically only 42 percent of peak earnings at age 45 or 50.

“Under all other sets of assumptions, saving does not begin immediately even with a match, although a match does bring forward the date at which saving begins,” the report reads. “When interest rates are low and the wage profile is steep, saving does not begin until the 40s even with a standard employer match.”

The Realities of Not Saving for Retirement Early

Young adults are less likely to contribute to an employer-sponsored defined contribution plan — such as a 401(k) — than any other age group.

And 20-somethings who do participate choose lower contribution rates than older workers, according to a 2020 Vanguard report.

Millennials are finding it increasingly difficult to save for retirement. This is related to a number of factors: Cost-of-living increases, crippling student loan debt and low wages for entry-level and mid-level workers.

Also at play are short-term financial goals, such as buying a home or new car or starting a family. Other long-term goals can include creating a college fund for your future children.

Many experts recommend paying off debts such as credit cards and establishing emergency savings before investing in your retirement. Some young people also focus on paying off other debts — such as student loans — before getting serious about retirement planning.

“In a perfect world, you should pay down all your debt — but everyone’s situation is different,” Robert Rosen, a Florida-based investment advisor with Edward Jones, told RetireGuide. “You may not want to miss out on investing for retirement because you spend all your extra money paying down student loan debt.”

Other factors that may limit younger workers from contributing to a retirement account include:

  • Not having an employer-sponsored 401(k) available.
  • Having part-time status, thus not being eligible for an employer plan.
  • Being self-employed.

The NBER report doesn’t account for other reasons for saving, such as buying a house or saving for a dream vacation. Researchers also acknowledge the uncertainty about future wages being higher in your 30s and 40s compared to the beginning of your career.

Researchers also noted that starting a family increases consumption needs, so “saving for retirement before having children may be rational.” Men and women with college degrees are typically in their late 20s when they first have children, according to the Pew Research Center.

“However, our general argument still applies to retirement saving that occurs in an illiquid employer-sponsored pension account,” the NBER report reads. “In such a model, it is not optimal for someone whose earnings are temporarily low, such as a college graduate at that start of their career, to save for retirement.”