You’ve probably got a list of financial goals you want to reach, but saving for retirement isn’t likely to be one of them. When you’re in your twenties, retirement is decades away and there’s no need to start thinking about it yet, is there?
Surely, you should be focused on short term goals like finding a well-paid job and saving up money for all of the things you want to do while you’re still young, like traveling. All of that stuff is important, but so is preparing for retirement. If you asked your parents, they’ll probably tell you that they never started saving for retirement when they were your age and they’re fine. You’re not going to be destitute when you’re older if you don’t start saving now, but you will have to be more careful with your money and you might not be able to do all of the things that you want to in retirement. So, how early is too early to start preparing for retirement.
If you’re saving $500 a year, starting 5 years earlier will give you an extra $2,500 when you come to retire. It doesn’t seem like that much and it won’t make a huge difference, but that figure doesn’t take compound interest into account. Compound interest refers to the interest that you build on the interest, rather than just the base amount you put in your savings.
If you’re adding to your savings account every month, that compound interest can quickly build up and your savings will grow. It’s like a snowball effect and the earlier you start, the more compound interest you’re going to generate. For example, if you put $100 into a savings account with 2 percent interest, you’ll have $102 the following year. Leave it in there for another year and you’ll end up with $104.4.
Each year, the amount of interest you’re earning goes up. You can use this great compound interest calculator to see how much you stand to make by starting your savings account earlier. Even if you can only save a small amount, start putting it away now. The compound interest you’ll get on it will give you a good head start and you’ll have a good base to build on when you can afford to start putting more aside every month.
It’s not something that you really want to think about but there’s always the chance that something bad could happen to you. You might fall ill or even end up in a fatal accident. If you haven’t started to make preparations for the future, that situation is going to be a lot harder for you and your family.
Even if you don’t have that much, you should consider seeing wills and estates lawyers just in case something happens. Otherwise, your family will have to jump through a lot of legal hoops.
Another thing that people often don’t consider is the fact that they might need to retire early. If you get injured at work or the company that you’re working for is struggling and needs to get rid of people, you might find yourself out of a job. Getting another one at the end stage of your career is going to be a real struggle and you’ll probably just have to retire early. If you started preparing early, you’ll have enough to get by. But if you left it too late, you’ll probably end up in a difficult financial position. You never know what’s going to happen to you in later life so you need to be prepared for every eventuality.
Nobody likes opening their paycheck to see how much they’ve lost to tax, but it’s a reality that you can’t avoid. Or can you? Well, not completely, but you can reduce your tax burden and better prepare yourself for retirement if you just get started with your saving early.
Most retirement savings accounts have good tax breaks that you should be taking advantage of. 401K’s, for example, will let you invest money tax free, though you do still have to pay the tax on it when you withdraw it in later life. That’s not a problem though because not having to pay the tax now means you can put more money in every month. The compound interest on that increased amount will help you to foot the tax bill further down the line. The earlier you start saving, the more benefit you’ll see from these tax breaks.
As mentioned, most big companies offer a 401K retirement account for their employees, but some bosses will go a step further and match your contributions. This is such a massive bonus because you can double anything that you put in there. If you’re not taking advantage of this, you’re really letting yourself down. Often, you won’t be automatically given a 401K, you’ll have to request it so check whether your employer offers one and sign up if they do. The quicker you start paying in, the more money you’ll get out of your employer so there’s no reason to wait.
Learning To Invest
Investing your money is the easiest way to secure your finances for the future, but it’s difficult to get it right and make sensible financial choices if you don’t know the first thing about investing. That doesn’t mean you should steer clear entirely, but it does mean that you should get started sooner rather than later.
When you’re first learning how to invest, you should be investing small amounts of money to minimize risks. That means it’s going to take a long time before you’re actually making any good money from your investments. While you’re young, you can afford to make a few small mistakes so it’s best to get started right away.
When you’re trying to work out whether to start saving for retirement yet, think about the kind of life you want to live when you’re older. If you want to be able to travel and go out without worrying about your savings running out, you need to start putting money away now.