For many people in their 20s and 30s, thinking about retirement is not on their radar. It is difficult to see the future of retirement at this age; it is years away, and there are so many things you plan on doing in the “here and now”, and in the next few years. I mean it did take FOREVER to: 1) get our driver’s license, 2) graduate from high school; 3) finish college, and 4) start our first “grown-up” job, right?
Fifty looks old when you are in your 20s, let alone looking to 67, which is the retirement age for anyone born in 1960 or later and want to receive full retirement benefits. You might be thinking, I have plenty of time to save for retirement; I might not live that long; or I want to enjoy my life when I am young and can physically and mentally be able to do things. It can also be difficult to save for your future when you are trying to pay off your student loans, possibly start a family, buy a home, buy a new car, go on vacations, and having some fun. Those are all valid thoughts; yet, getting an early start on retirement has many benefits.
Mass Mutual says, “two out of three 21- to 32-year-olds haven’t started saving for retirement.” You might think, why is that important, I have a lot of time before I retire to save. However, what you might not know is that if you can start saving for your future in your 20s and 30s, you will have a stronger chance of ensuring that you can take care of yourself and not rely on other sources. Per Mass Mutual,“You don’t want to depend on Social Security, Medicare, Medicaid, or even relatives to take care of you in retirement. They’re all unreliable sources that you can’t control.”
I was lucky that a few years into my 20s, when I started a new position, a co-worker popped his head into a conference room during my lunch break where I was reviewing my benefits and said, “put it in all in” kind of teasingly. I was honest with him and said that I didn’t really know what I was doing. I’m sure I talked to my parents about it some, but it was still pretty overwhelming to have to make all these medical, dental, and financial choices. My co-worker sat down and explained 401k to me and how the company would match my contribution up to a certain percentage, and that I should start saving as soon as possible for retirement. Unfortunately, not all companies match contributions, and it may not always be wise to go with your company’s selection of funds, but what is important is that the sooner you start saving the longer it has time to “grow” for you.
One reason to start early is, unless you have someone who pays all your expenses, you are used to making sacrifices to go to school, live on your own, buy your groceries, etc. If you put money into a 401k, 403b, Traditional IRA, or Roth IRA, starting with your first paycheck or by automatically having it taken from your checking into one of these accounts, you will not miss the money because you have never had it. It will be more difficult to start saving after you get used to spending the money you make then if you do not spend it from the beginning.
“Compound interest” is an additional reason to start early; the U.S. Securities and Exchange Commission’s mentions that the, “Compound interest is the interest you earn on interest. This can be illustrated by using basic math: if you have $100 and it earns 5% interest each year, you’ll have $105 at the end of the first year.” Vanguard postulates, “In fact, if you save just under $4,500 per year over a 45-year career, you could have over $1 million by the time you retire.”; this amount would be $375.00 a month.
Not to mention that saving money to a retirement fund early reduces your current income taxes. Putting money into a 401k, 403b, or Traditional IRA is tax free until you take it out; the assumption is that you will have less income coming in once you retire, and that puts you in a lower tax bracket, which means paying less taxes on that money. You can also save money to a Roth IRA. When you use a Roth IRA, you pay taxes on it now, but do not pay taxes on it when you take the money out.
Putting money away now can be a little overwhelming, especially when you are not earning a lot of money, you do not understand how these types of accounts work, and you have debt and bills to pay. I am not a financial advisor, and I would definitely recommend that you talk to someone who knows about these different types of accounts. Nevertheless, if you can, I would suggest starting a retirement fund as early as possible, so that your money makes money for you, now and into the future.