When to start saving for retirement
There’s an old, well-known adage that says, “There’s no time like the present.” We’ve all heard the phrase at one point or another, and while it probably wasn’t referencing when to start saving for retirement the first time it was uttered, it may as well have been.
When saving for retirement, two important factors come into play: money and time. The industry tends to focus more on the money aspect—constantly pointing to the disastrous effects of too-low contribution levels on retirement outcomes. However, time is arguably more important. The sooner you begin to save for retirement, the more time your money has to grow. And the more time your money has to grow, the more time compounding interest has to do its thing: grow your nest egg.
Why it’s important to save for retirement as soon as you can
When it comes to deciding at what age you should start saving for retirement, there’s no time like the present. Whether you’re 22 and just got your first job or you’re 55 and are seeing the light at the end of the proverbial career tunnel, if you don’t have anything stashed away for retirement, now is the time to start saving.
But why should someone right out of college worry about putting away money for retirement, which could be 40 years down the road, when expenses like rent, groceries, and student loans are knocking on their door right now? Again, it’s not about how much—it’s about how long.
It all boils down to one simple mathematics principle: compounding interest.
Remember when your elementary school teacher asked whether you would end up with more money after a year if you earned one dollar per day or if you earned one penny on Day 1 and doubled your money each day thereafter? You were probably shocked to learn that you’d be better off at the end of the year by choosing the penny option; and even though it’s highly unlikely your assets will double in value each and every day when saving for retirement, the effect is similar.
Compounding interest happens when the funds you contribute to your retirement plan earn interest, eventually growing to an amount large enough to begin earning interest on itself—creating a snowballing effect that can significantly grow assets over an extended period of time. And the earlier you start saving, the earlier compounding interest can start accruing and the higher likelihood you have of reaching your retirement goals.
Let’s break it down.
Say you choose to start saving at age 25 and decide to contribute $3,000 per year to your job’s 401(k) plan for the next ten years. If you decide to never contribute another cent to your retirement fund once you reach the age of 35 (which we don’t recommend doing) and plan to retire at 65, your funds will have 30 years to grow. Assuming 7 percent annual growth, your $30,000 in contributions will grow to about $338,000 by the time you retire.
Now let’s say you prioritize paying student loans off right out of college and choose to delay saving for retirement until age 35—just ten years later than in the first scenario. You again decide to contribute $3,000 per year to your retirement account, but this time you choose to save for 30 years, instead of 10, to make up for the lost time. When you reach your retirement at 65, your $90,000 in contributions will have grown (again, assuming 7 percent annual growth) to roughly $303,000. So despite the fact that you contributed to the account for an extra 20 years—putting in an additional $60,000—you still end up behind. That’s the power of compounding interest. That’s the power of saving early.
Common reasons workers aren’t saving for retirement
Clearly, compounding interest benefits savers by rewarding them with snowballing returns over the course of a career. So it only makes sense to begin saving for retirement as soon as possible, right? In theory, yes. But 36 percent of Americans are not saving anything for the future, giving plenty of excuses to put off saving for retirement: high cost of living, debt, and medical costs—to name a few .
And it’s true; every situation is different, with saving discrepancies coming in based on age, income, gender, and marital status. That being said, making sure you set aside money for a financially-secure future isn’t optional—it’s mandatory. Are medical costs going to get lower as you age and get closer to retirement? Probably not. Will the cost of living go down in the future? Judging by the fact that inflation is currently at its highest level since 2012 , that’s not likely either.
Surely, non-savers have to know they won’t have the same quality of life in retirement as adamant savers, at least? Well, despite their complete lack of preparation and savings, non-savers actually envision their golden years playing out the same way savers do—sprinkled with plenty of travel and time spent with family. So how do they plan to pay for frequent vacations or trips to see the fam? Here’s where it gets worse: non-savers plan to rely heavily on Social Security and personal savings to help fund their lifestyle in retirement .
But it’s not like pre-retirees can rely solely on Social Security benefits to help them achieve a financially-comfortable retirement—especially since the average Social Security benefit only amounts to $1,404 per month or $16,848 per year . Not to mention that no one can even be quite sure of what Social Security benefits will look like in the future, with the Social Security Administration set to run out of money in 2034, all things unchanged.
Today’s workers need to utilize a multi-faceted approach when saving for retirement, combining personal savings with Social Security benefits with savings from an employer-sponsored plan like a 401(k). And luckily, there are easy ways to get started—even on a tight budget.
3 easy ways to start saving money for retirement
If you’re ready to start safeguarding your financial future, there are a variety of easy ways to begin putting away money without adding significant stress to your wallet or bank account.
· Start today
We already showed you the power of compounding interest and how it benefits those that save as early as possible, but starting today is important for another reason as well. Common sense tells us that the sooner we start saving, the more time we have to save. And when we have more time to save, our contributions don’t need to be quite as high each month or year to reach our retirement goals as they would if we don’t start saving for many more years. Saving even just $50 per month now will help build a solid foundation for retirement and may help you avoid the need to save significantly more per paycheck years down the road just to help you catch up.
Saving for something that’s so far off in the distant future may not seem worth it when you’re already juggling multiple financial responsibilities, but there will never be a “perfect” time to start saving money for the future. Paying your future self should be just as important as paying your bills or other necessary expenses now, and should be more important than “treating yourself” to new toys or gadgets you don’t need. There are going to be challenges from the get-go, and there may even be months where you can’t afford to save as much—such as when an unexpected expense, like a car repair, pops up. But push through any and all challenges you face, and you’ll be rewarded for your efforts with a financially-secure retirement.
· Contribute to a 401(k) or similar retirement plan
Statistics show that workers are more likely to save for retirement when they have access to some type of employer-sponsored retirement savings plan, like a 401(k), and about 65 percent of employers today offer some type of retirement plan to their workers . If you have access to a retirement plan through your employer, start saving in it as soon as you can. Your contributions don’t have to be large or significant either—there’s no shame in saving small amounts if that’s what your budget allows. Any amount of savings is better than no savings. Just make sure to increase your contribution levels as your salary increases or as you pay off debt—rather than succumbing to lifestyle inflation—to continue growing your nest egg.
If a 401(k) or similar employer-sponsored retirement plan isn’t part of your benefits package, consider opening a Traditional IRA or Roth IRA to begin at least saving something.
· Determine your risk tolerance
Risk tolerance is essentially the degree of comfortability investors have as it relates to market risk. For example, someone with an aggressive risk tolerance would feel more comfortable weathering through market ups and downs than someone with a conservative risk tolerance. Risk tolerance is often associated with age—younger investors are usually more aggressive than investors approaching retirement.
Have plenty of time to save? Consider utilizing an aggressive portfolio model to maximize potential returns on your investments. Just remember to be realistic about your expectations and at least somewhat un-phased by market changes. Bear and bull market cycles happen all the time, so don’t let a declining market send you running for the hills at first glance. It’s often worth it to “hang in there” because the average bull market period—when the economy is strong and investor confidence is on the rise—lasts an average of 9.1 years with cumulative total returns averaging 476 percent, while the average bear market—characterized by falling investment prices and investor pessimism—typically lasts just 1.4 years with an average cumulative loss of 41 percent .
On the flipside, if you’re quickly approaching retirement, a more conservative model may be a better fit to help protect your assets and nest egg.
Started saving late? How to utilize catch-up contributions
It’s best to start saving as early on in your career as you can, but no one has a time machine to go back and begin stashing away money earlier if they procrastinated a little longer than they should’ve. Luckily, catch-up contributions exist to help savers that are approaching retirement “catch-up” on their retirement savings.
Under normal circumstances, workers can contribute up to $18,000 into their 401(k) each year, unless they are over the age of 50. Once pre-retirees hit age 50, they’re eligible to contribute an extra $6,000 into their 401(k), if their plan allows (as most do), for a grand total of $24,500 in savings per year.
Catch-up contributions also apply to IRA accounts; savers can contribute $5,500 per year until age 50, at which point they can contribute an extra $1,000 above and beyond the normal limit for a maximum contribution limit of $6,500.
The most important part of saving for retirement is to just start doing it. Whether you’re fresh-faced right out of college or you’re staring down the barrel of your golden years, putting away money right now can only improve your retirement outcomes and the quality of life you’ll experience during the autumn of your life. It’s never too early or too late to start saving for the future, so take the small step of saving and enjoy the giant leap towards owning your retirement readiness.