I can think of a TON of reasons why most 20-something’s don’t save money for retirement. It’s understandable, of course, especially when sometimes it’s hard just to keep a budget. Usually I have already planned ways to spend my money at least a year out! But unless you plan on working until you’re 80, you should think about saving for retirement…well…today!
The benefits of saving early AND often are amazing, really. The funny thing is that not many of us are taking advantage of it! But maybe you just haven’t started believing it quite yet. As an example, let’s say you dig a little deeper this month and save $100. If you were age 30 and you invested that money into a normal savings account at 5%* interest and forgot about it, adding nothing to it, at age 60 that money would grow to $447. If you were 20 years old and did the same, at age 60, $100 would be worth $736. Now just think if that money was invested at a rate of 10%*—your money at age 30 would grow to be $1,984 versus $5,370 if you had invested only 10 years earlier. The moral of this story…time IS on your side.
The best thing about all of this?—that $5,370 assumes that you never add to your contributions. As your income climbs so should your contributions. Soon enough you’ll be able to bank on retiring with a “million dollars” in your account! Sound like something you could get into? Then let’s get started!
First things first—eliminate the debt! You’ll get the most BANG for your buck if you pay off those high-interest credit cards asap. Whereas student loans are relatively “cheap” debt; meaning you can stretch them out over time and pay them off slowly as long as you make the payment in full. Plus, it can help maintain your credit score. Do that and you’ll have money available to start an emergency savings account. If you don’t have that emergency savings to fall back on, in case your car breaks down or you get a high doctor bill, those expenses will go right back onto the credit card. So make sure you have plenty of liquid money set aside. A good rule of thumb is to have enough money to cover at least 3-6 months of living expenses. Direct deposit does wonders for this sort of thing! You won’t miss the cash nearly as much if it goes directly to your savings account instead of your pocket or to the mall.
The same goes for a 401(k) plan—money that’s also pre-tax! Most companies match the money you contribute from your paycheck; on average ranging from 2-6%. Yes, that’s free money. Who wouldn’t take it! Do you feel like you’ve exhausted your savings resources? Well, not yet. Where, you ask, are you going to get that last bit of money to invest into bigger things? Tax refunds…BOO YAH! This time of year most of us will receive that wonderful money back from the government. Whether the sum is small or large, it’s a great idea to take a big chunk of it, if not all of it, and put it directly into savings. So what type of savings should you invest in?...an IRA of course!
A Roth IRA is great if you don’t need a tax break right now and want more flexibility. With a Roth IRA the money you put in is after-tax dollars; BUT earnings are tax-deferred and withdrawals are tax-free and penalty-free. If the account is open for five years you can make withdrawals for qualified reasons such as hitting age 59½, disability, education or a first-time home purchase. A traditional IRA is great if you want the tax deduction right now. It also makes sense if you think you’ll be paying lower taxes at retirement since your earnings grow tax-deferred until you make withdrawals. You’ll also have to begin taking minimum withdrawals once you reach age 70½.
The choice is yours, but if you want to hit that “million dollars”, get a head start by saving today! Remember, when it comes to saving for retirement the thing you can never have more of isn’t delicious fudge-covered Oreos…it’s time!
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