When should I start saving for retirement?
When you are young, retirement is likely the last thing on your mind but planning for it shouldn’t be. The earlier you start saving, the more time your money has to grow and the more financially healthy you’ll be in your retirement years.
The magic of compound interest
The biggest benefit to starting early is the value of compounding interest. Compounding interest is when the earnings of an investment are reinvested into that same investment and continue to grow. It’s like earning interest on interest, and it can lead to substantial investment rewards. The critical component in compounding is time. In fact, the amount of time you have even outweighs the amount of money you invest.
Here’s an example: let’s says you want to start saving and invest $1,000 with the credit union. You also decide to save $150.00 each month after that. After 30 years, assuming the average interest you’ve earned is around 5%, you’ll have over $125,000! The total amount of money you invested was $55,000, but through the magic of compounding interest, you were able to earn an additional $70,000.
If you follow the same scenario but only save for 15 years, your total is only $40,000, and your net return is $12,000. Those extra years make a BIG difference so the sooner you start, the better. Want to run the numbers for yourself? Check out this calculator to see what compound interest could do for you.
If you do want to start investing, here are two common ways to get started.
Ideally, you’ll be able to start saving as soon as you begin earning a paycheck. If you employer sponsors a 401(k) plan, that’s a smart option, especially if they offer a matching contribution. The money you contribute to the plan is automatically deducted from your paycheck and deposited into your 401(k) account before it’s taxed which allows you to save a little more. It also lowers your current tax liability since you won’t have to pay taxes on the contributions or the earnings until you take a distribution from the account. Generally, a company will match your contribution to the plan up to a designated percentage. It’s essentially free money so the sooner you take advantage of this benefit, the better.
Another way to start saving for retirement is by contributing to an IRA. With a Roth IRA you contribute after-tax money to the account, but any money withdrawn later is tax-free. You can also arrange for a monthly direct deposit into your Roth IRA which will help you stick to a savings plan. If you’re self-employed, you have the option of opening a SEP IRA. You won’t have the benefit of a company matching contribution, but it will still offer the ability to save on a tax-deferred basis.
The sooner, the better
When it comes to compounding, time is your friend. The smartest step you can take today is to start saving for tomorrow. It doesn’t take a lot of effort, especially since most retirement savings plans are set up for automatic investment. Just remember, the earlier the better because tomorrow will be here sooner than you think!