Why you’re never too young to save for retirement
When you’re early in your career, retirement seems a lifetime away. Student loans, rent and other pressing obligations make it easy to overlook saving for retirement, but that’s the last thing you want to do.
Saving for retirement when you’re in your 20s and 30s can help you take advantage of what Albert Einstein called the eighth wonder of the world – compound interest. The earlier you start investing for retirement, the more time your money has to grow, which translates into less money you must save to reach your goals.
Here’s a good example to illustrate how starting to save younger equals less total money you have to save over time. If you begin saving $200 per month at age 25 and get an average annual return of 7%, you will have $512,662 by age 65. If you save the same amount but wait until age 35 to start, your portfolio would only reach $242,575. (These figures assume a 7% annual rate of return, which isn’t guaranteed.)
You may think it’s impossible to save $200 or more a month. Remember, if you contribute to a 401(k) plan, your employer’s matching contribution counts towards that amount. Use this to scale your saving ability, and pay yourself first. The contributions to your 401(k) are automatic and pre-tax, so get in the habit of living off what’s left.
So, how do you free up money when you have to pay for all those living expenses each month? Here are five tips to start saving for retirement as early as possible.
1. Set a short term target
In your 20s and 30s retirement is possibly as much as 40 years away, so it may seem futile to plan for that unknown. Yes, most experts recommend replacing 70% of your final working year’s income for retirement expenses, but what does that mean for you now as you look to save? Just as you wouldn’t train for a marathon by running 26 miles right away, start with a short term target.
Fidelity recommends you have at least one years’ worth of salary saved by age 30. By age 45, that amount rises to three years’ salary; by age 55 it’s five years’; and by age 67, it’s eight years’ worth of salary. When examined this way, it’s easy to see how starting younger makes reaching each marker easier to manage. Still, no matter which of the above targets you’re aiming to hit, the goal can seem daunting. Your 401(k) company match can make it easier.
Start by contributing enough money to maximize your company match, which could be the first 3% of your salary contributed to your 401(k), for example. Anything under that means you’re bypassing free money. However, if you can’t meet the maximum amount, then start with $100 per month. Above all, don’t let the enormity of the goal frighten you into inaction. Doing nothing at all is the worst thing you can do.
2. Make A Realistic Budget
It’s easy to let day-to-day needs stunt saving for your future. The best way to manage your current life and be kind to your future self is to create a realistic budget that lets you live life now while saving for retirement. To accomplish this, monitor your spending for a few months in search of savings opportunities.
This may sound difficult, but there are apps that make it simple. Most experts recommend saving 15% of your income for retirement and creating a realistic budget helps you get as close to that as possible.
3. Make Savings Automatic
Life is busy, which makes it easy to forget to save. The best way to avoid this is to automate your savings. Many employers allow you to do this through a 401(k) plan. Remember, doing so allows you to optimize your savings if they provide a match. Also, your money grows tax deferred in a 401(k), i.e. investment earnings are not reduced by any taxes. If you have taxable investment accounts, ask if they provide automated savings options.
4. Avoid Lifestyle Inflation
Lifestyle inflation, or spending more as you earn more, can be difficult to avoid. You want to be realistic, but you also want to avoid debt as it’ll take away savings opportunities. If you avoid extreme inflation and grow an emergency fund to help in times of need, you set yourself up for weathering any storms life may throw your way.
5. Think to the Future
The beauty of compound interest is that the earlier you start, the more your money earns. Even if you start with a small amount, a long time horizon will grow your money as long as investments trend positively. Think of it as making a payment to your future self. The money spent on a daily coffee could really amount to significant sum later in life if invested. The amount may seem meaningless now, but giving your money more time to grow is the recipe for a robust portfolio upon retirement.
Want help getting ready for retirement? We’re here for you. Contact us today for help creating a plan that meets your needs today while setting aside money for tomorrow.