When should I start saving for retirement? Is it too late?
Thinking about the future and retirement can seem like something you won’t need to worry about for a long time. After all, you won’t retire until your mid-60’s. But where will that money come from? Some people assume you won’t need to start saving until you’re well into your career and perhaps even just a few years short of that big retirement party and that congratulatory watch given to you from your employer. The truth is, the sooner you can start put money aside the better off you are. When it comes to putting money into a retirement plan there is nothing better than knowing that money will be compounding annually, so the sooner you start contributing, the sooner you can see that amount start to snowball into a much larger nest egg for anything you might want to do in retirement.
For example, if you were to put $3,000 a year into a tax-deferred retirement account for 30 years you would have contributed $90,000 out of your own pocket. Let’s say you have an 8% return on your retirement account, after 30 years that $90,000 will compound into $367,000.
That amount of savings is impressive and a great start to retirement, but if you start earlier you can get ahead much faster. If you decide to start saving when you’re in your mid-20s and you contribute the same amount of $3,000 a year for 10 years then stop saving altogether, that $30,000 will compound into about $470,000 by the time you’re 65. So despite the fact you didn’t contribute any money beyond your mid-30s you were still able to raise roughly $100,000 more with the money you only put in during that 10-year period because you let it compound an additional 30 years after you stopped. If you decided to put money in until the day you retire, that compounding interest will grow exponentially larger than it would if you stopped 30 years before.
After a period of time you might notice that your retirement savings have grown to a large amount and you might be tempted to use some of it for everyday expenses or making a large purchase. Sometimes life happens and you need that little bit of help, but unless it’s an absolute emergency it’s never recommended to touch your retirement savings. The compounding interest that makes your account grow will be reduced because the amount you have in your account will be reduced. You want to make sure that number is growing at a steady pace and you can count on your savings when you no longer have a steady income and paycheck to pay for your living expenses when you retire. While saving now on your own is proactive and a good start, talking to a certified retirement or financial planner will put you on the right track to meet your financial needs long-term, or even in the near future if that's something you're also interested in. A retirement planner can help you figure out what you want to achieve in retirement, the lifestyle you want to maintain, and the figure out how to make that possible for you based on your needs and resources.
Of course the hardest part of finding $3,000 a year (or any significant amount) to put away is finding that amount in your disposable income. If you’re in your 20s or 30s you’re probably not in the higher end of your potential salary. As you gain experience in your chosen profession, your compensation and salary will most likely rise. Even $50 or $100 a month is better than nothing when it comes to investing in your retirement because even the smallest amounts of money can start growing and with time make a healthy contribution to your overall retirement savings. Start with what you’re able to set aside now and take advantage of any raise you may get to contribute a bit more. Making your contributions automatic helps not only put your money into an investment faster, but also creates less temptation to spend it. If you start to automatically contribute money you’ll notice fairly quickly that you don’t miss the money as much as you thought you would because you never had a chance to spend it in the first place.
Saving for retirement when you’re younger gives you the advantage of time to get your investments compounding. Starting to save later and saving the right amount can be accomplished, but starting earlier gives you room to get there comfortably without the stress or worry of saving a lot in a short period of time. The amount of money you’re able to put away if you start in your 20s or 30s will also be significantly larger than if you start in your 40s or 50s. Take advantage of the time you have now to make whatever contribution you can to your retirement savings because it will pay off and you will be much happier when you finally retire.