Most financial experts advise starting to save for retirement from a young age. Since the average retirement age in the U.S. is 63, you have considerable time to understand your future needs and accumulate enough savings if you start saving in your 20s. However, you should take care not to fall into the trap of delaying saving for retirement. Retirement planning is a long process wherein you have to consider several factors such as inflation, changing financial needs, taxes, etc., that may pose a challenge to your future financial security. Thus, it is important to start retirement planning early and ensure you have enough saved for a comfortable retirement.
If you are in your 20s right now, the future may seem like a distant dream making it difficult to think of your future financial situation. It is quite likely that you may be juggling a student loan, a low-paying job, or even job and food insecurity at this stage of your life. You may struggle to get a high-paying job right out of college. Not to mention you would need to take care of your non-discretionary expenses such as rent, electricity, groceries, and more. Saving for retirement may be the furthest thing from your mind at this point in your life. That said, you cannot ignore the opportunity of starting saving early for your golden years. It is advised you consult with a professional financial advisor who can help you set up a budget, manage your finances, and choose investments to start saving for retirement.
This article discusses the reasons why you should start saving for retirement early and when you should start planning for retirement.
6 reasons you should start saving for retirement early in life
1. You can harness the power of compounding
Suppose you begin saving in your 20s to retire in your 60s, you would have around 40 years to build a substantial retirement fund. But if you begin at 35 and plan to retire at 65, you would lose out on an entire decade’s worth of savings. You may think this as insignificant but the difference in your final earnings can be considerable. Try and use the power of compounding by reinvesting your profits in the market to earn higher returns. By investing your money from a young age, you can stay invested for a longer term allowing you to earn more money in the end.
2. Maxing out your retirement contributions from a younger age helps build a larger corpus
You can also begin contributing to your retirement plan from a young age giving your money more time to generate returns for you. Most employers offer a 401k retirement plan that you can use to build a substantial retirement corpus. The major benefit of contributing to a 401k retirement account is the employer match. Here the employer may match every dollar you put in your account either wholly or partially up to a certain limit. In essence, this is free money you receive in addition to your salary and other perks at work. For 2023, you can contribute a sum of $22,500 per year and an additional $7,500 as a catch-up contribution if you are over 50. That said, the general limit on the total employer and employee contributions for 2023 as per the Internal Revenue Service (IRS) stipulations is $66,000 ($73,500 including catch-up contribution). Due to the high value of the sum involved, it is strongly recommended that you max out your 401k contributions even if you have prior financial liabilities.
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3. Having fewer responsibilities when you are younger can help you save more
When you start working at a younger age, you have limited needs and fewer financial liabilities. In your 20s, you may not need a bigger apartment and can save on rent. You can also save money on groceries, fuel, insurance premiums, education expenses, etc., and invest it for your future needs. However, as you grow older, you would probably get married and later on have kids. You have to take care of their needs which means that you will have a lesser amount to put toward your retirement.
That said, you should make the most of your youth and enjoy it to the maximum but refrain from spending all your money. Spend on travel, eating out, clothes, etc., every once in a while but try and cut out any frivolous expenses as well. For example, you can cancel some of the OTT subscriptions you do not need, travel by public transport instead of cabs, start eating more at home, and more. Avoid falling into the trap of peer pressure. Understand that you do not have to deprive yourself of little things that give you happiness or live frugally and save all your money for the future. Focus on making small changes that do not affect your quality of life such as making a budget and sticking to it, not spending above your means, saving more, and adopting better financial habits, etc.
4. You can take advantage of having a higher risk tolerance when you are younger
Investments carry varying degrees of risk ranging from high-risk investments that offer higher returns to low-risk options that deliver relatively lower returns. You can choose your investments based on your risk tolerance and financial goals. Moreover, your risk tolerance is at its highest when you are young. Your risk appetite gradually decreases as you age which is why it is advised that you begin retirement planning at a young age when you may be more inclined to invest your money in high-risk, high-return investments. Doing so would help you earn a substantial amount of money at a younger age. On the flip side, if you start saving for retirement at an older age, you may be unable to take as much risk which may affect your ability to earn higher returns. This may result in you ending with a smaller retirement fund than you had hoped for.
5. You have access to more time and money to balance various financial goals
If you begin planning for retirement at an earlier age, you would have saved more money and can be further ahead in attaining your financial goals. Suppose you start putting away money toward retirement in your 20s, by the time you reach your 30s you would have in all likelihood saved up a substantial amount of money, gotten married, and had kids. Since you have already got a headstart, you would be able to devote more time and effort toward tackling the pressing issues ahead of you without being unduly stressed out. Moreover, you would be able to plan for multiple financial goals and concentrate on meeting your future targets. However, if you start saving for retirement at a later stage in life when you are already married with kids or planning to have kids, you are more likely to become stressed. You would have to juggle several expenses such as your child’s education costs, food, clothing, healthcare, and more. Moreover, you may be looking to buy a home and may have to add a mortgage to your list of expenses. It would be fair to say that you may commit mistakes in trying to meet your needs and may even become a victim of financial fraud that promises high returns in a short period. Try and stay clear of such schemes that prey on vulnerable investors.
6. You can work harder in the present to reap rewards later on in life
You can enjoy a stress-free life in retirement if you put in the long, hard yards in the initial years of your career. If you start retirement planning early, you can take advantage of the power of compounding where even small contributions can add up to a lot. Set up a budget with a target to save at least 20% to 30% of your monthly salary for your retirement savings. Ensure that you set a percentage target rather than a lump sum amount. Doing so would help increase your savings since when you advance in your career and your income goes up, your savings rate would go up as well. Not only will this help build financial discipline but also help ensure that you remain consistent in the long run.
But suppose you wait till your 40s to start saving for retirement. Not only will you have to save at a much higher rate but may also have to change your lifestyle abruptly to meet your savings targets. Making changes to your lifestyle at a later stage in life to live frugally can be tricky, to say the least. Further, you have less room for errors as you inch closer to retirement. You have to exercise restraint and be diligent with your investments. If you are unable to save enough money for retirement, you may need to either postpone it or take up a part-time job to meet your living expenses. This can be a source of stress for you and may even lead to health issues in the future.
Is there an ideal time to start planning for retirement?
Though there is no ideal time to start planning for retirement, it is advised that you begin saving for retirement from a young age. There are quite a few advantages that you can benefit from if you go down this path. Apart from being in a more relaxed frame of mind, you can plan out your expenses so that you don’t have to tackle big purchases at the same time such as buying a car, house, etc., and have enough funds if an emergency arises. Thus, try to start saving for your golden years from the time you start earning.
4 things to keep in mind while you start planning for your retirement
1. Consider opening a 401k retirement account
When you first start a job, you would most likely be offered a 401k retirement plan to invest in. It is a company-sponsored plan offered by most employers along with an employer match wherein You can contribute a maximum of $22,500 per annum along with a further $7,500 (if you are over 50) in 2023. It is advised that you try and max out your contributions and if not, try and contribute as much as you can since employers match employee contributions either wholly or partially, up to a certain limit.
2. Eliminate debt
Debt can eat away at your savings and affect your ability to save and invest your money. Thus, ensure that you get rid of debt as soon as possible. Some of the most common forms of debt include student loans, mortgages, credit card debt, etc. Try and pay off your debt so that you do not have to worry about making high-interest payments during retirement. Try and avoid debt in general by limiting your use of credit cards, taking out loans, and more.
3. Keep your spending in check
As you begin earning money, you may be tempted to spend on things that you may have always desired but were unable to afford before. This could be luxury goods, a nice vacation, a car, etc. The options are endless. That said, you should try to control the urge and avoid making impulse purchases. Create a budget to keep your spending in check and try to stick to it.
4. Consult with a financial advisor
Seeking professional advice can help you streamline your finances and create a viable financial plan suited to attain your goals. You can hire a financial advisor on a fee-only or commission-based model based on your budget and financial needs.
To conclude
The main objective of starting to save for retirement early is to ensure you have a significant retirement corpus at the time of retirement. If you start saving from a young age, you have more time to reach your goals. Start small and gradually up your savings rate as you advance further in your career. Make sure you have a retirement plan in place that will allow you to live comfortably during retirement.
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