If you’re an adult in your 20s, you are entering an exciting stage of life. It’s no surprise that retirement may seem a long way off. What you may not realize, however, is that there are four very important advantages to beginning to plan and save for retirement now.
1. Money management skills
Part of developing financial responsibility is learning to balance future monetary needs with present expenses. Sometimes that means saving for a short-term goal and a long-term goal at the same time.
Once you become used to balancing your priorities, it becomes easier to build a budget that takes into account both fixed and discretionary expenses. A budget can help you pursue your financial goals and develop strong money management skills.
2. Time on your side
When you’re young, you have the benefit of time on your side when saving for long-term goals. You likely have 40-plus years ahead of you in the workforce. With that much time, why not put your money to work using the power of compounding?
Here’s a hypothetical example of how compounding works. Let’s say that at 25, you start putting $300 each month into your employer’s retirement savings plan, and your account earns an average of 8 percent annually. If you continued this practice for the next 40 years, you would have contributed $144,000 to your account, accumulating just over $1 million by the time you reached 65. But if you waited 10 years until 35 to start making contributions to your plan, you would have accumulated only $440,000 by 65.
Note: This hypothetical example of mathematical compounding is used for illustrative purposes only and does not represent any specific investment.
Taxes and investment fees are not considered. Rates of return will vary over time, especially for long-term investments. Investments offering the potential for higher rates of return also involve a higher degree of risk. Actual results will vary.
3. Workplace retirement benefits
If your employer offers a workplace retirement plan such as a 401(k), you may find that contributing a percentage of your salary will make saving for retirement easier on your budget. Contributions are typically made on a pre-tax basis, which means you can lower your taxable income while building retirement funds for the future. Depending on the type of plan, your employer may offer to match a percentage of your retirement plan contributions, which can potentially result in greater compounded growth and a larger sum available to you in retirement.
If you don’t have access to a workplace retirement savings plan, consider opening an IRA and contribute as much as allowable each year. An IRA may offer more investment options and certain tax advantages to you.
If you have both a workplace plan and an IRA, one strategy is to contribute sufficient funds to your workplace plan to take advantage of the full company match, and then invest additional funds in an IRA.
4. Flexibility of youth
Although there’s a good chance you have student loans, you probably have fewer financial responsibilities than someone who is older and/or married with children. This means you may have an easier time freeing up extra dollars to dedicate toward retirement. Get into the retirement saving habit now, so that when future financial obligations arise, you won’t have to fit in saving for retirement too. You’ll already be doing it.
The writer is a wealth management adviser at Minster Bank.