Most people can expect to live for about 18 years after retirement. That’s 18 years of minimal income, but it’s also probably time that you want to spend enjoying yourself (traveling, spending time with family, pursuing a hobby, etc.).
No matter what your dream retirement looks like, it’s important to be ready for it. And it’s never too early to start planning. Why?
Compounding. Investing early can make a big difference because of compounding. Essentially, if you invest, earn, and reinvest those earnings, your earned money will make you more money. The earlier you get this ball rolling, the bigger your payout will be at the end. This article uses this as an example:
- If you start investing $300/month when you’re 25, and you earn 8% on that money each year, you’ll have over $1 million at age 65.
- If you start investing $300/month when you’re 35, and you earn 8% on that money each year, you’ll have about $440,000 at age 65.
- In this scenario, 10 years makes a $560,000 difference.
Education. Saving for retirement, especially early, teaches you to practice discipline with your money. You’ll get used to saving, instead of living paycheck to paycheck. You’ll learn how to invest, which can be a valuable thing to know in your retirement years.
Taxes. Contributing to certain retirement accounts allows you to get certain tax benefits. The benefits you get will depend on what type of account you use.
Safety net. What if you decide you want to retire early? What if you lose your job before you retire? Saving now will open up doors for you should either of these scenarios arise.
These are just a few of the reasons why it’s important to start saving for retirement early.
But how do you get started with your retirement planning and saving? Here are some tips.
- Figure out how much you need. Take a close look at your budget, spending, and income. Think about the kind of lifestyle you want to have when you retire, and think about how old you want to be when you retire. Use this information to calculate how much you need to save in order to retire comfortably.
- Open retirement accounts. A 401(k), IRA, and/or Roth IRA, among other account types are invaluable assets when it comes to saving for retirement. Talk to a financial planner about which type of account would best meet your needs.
- Make contributions automatically. Take your 401(k) contribution out of your paycheck automatically (your employer should be able to set this up for you). Also, set up automatic transfers with your bank that make saving mindless.
- Plan for emergencies. Ideally, your retirement savings shouldn’t be touched until you, well, retire. That means that you should be prepared to pay for any emergencies out of pocket. Make sure you are continuously contributing to these emergency funds, so that you can handle life’s ups and downs without ruining your retirement plans.
The prospect of saving for retirement can seem daunting, but the earlier you get started, the better off you’ll be. Stop putting it off, and start planning today!
Leave a Reply