Planning for a future 40 years from today may seem impossible, crazy, and downright unnecessary… especially when it’s hard enough to see past that dreadful exam you haven’t started studying for. While retirement is in the far off future, saving for retirement early will help you maintain your standard of living as you enter your 70s and help you avoid turning back to your college ramen noodle diet.
Why Save Now?
Ideally, you should start saving in your 20s, once you graduate and begin earning paychecks. By starting a retirement fund today, your investment will have more time to grow and compound, meaning that each year’s gains will generate their own gains next year. The following graph shows the impact of investing early.
This chart assumes a 7% annual return. Investing $5,000 annually between the ages of 25 and 65 will result in a total of $1,142,811 for retirement. Your retirement fund will have $602,070 more than if you would have waited to make the exact same investment…10 years later. For further comparison, if you only invested between the ages of 25-35 (10 years), you would have earned $61,329 more than investing between the ages of 35-65 (30 years), all else equal.
That sounds great! So how do I get started?
How you plan for retirement when you’re younger will differ from when you’re older. When you’re younger, you should save at least 7% of your salary for retirement. With the average salary of those between the ages of 20-30, $32,000, your average annual retirement savings will be approximately $2,240. This equates to putting away $43 per week, or giving up a few Starbucks coffees or Uber rides.
Many employers will offer a 401(k) retirement savings plan. If your employer offers to match your 401(k) contribution, take advantage of this benefit by contributing at least the amount that they’ll match. By doing so, you will double your retirement contributions at no additional cost to you.
If your employer does not offer a 401(k) plan, you might consider an IRA (Individual Retirement Account) as a means of investing for retirement due to their tax savings. You can open an IRA through your bank, or other entities such as Wells Fargo or Edward Jones. When choosing what to invest in, you will want to invest more aggressively when you are younger. This means you will want to invest in high-risk/high-yield options, such as stocks. Even if your investments perform poorly in the short run, you will have time to recover financially prior to retirement. Investing is no easy task and many choose to hire a financial planner. To ensure your planner is top-notch, you can utilize http://www.plannersearch.org/ to search for planners who are certified.
I Can Rely on Social Security, Can’t I?
In order to be well prepared for retirement, it is a good rule of thumb to save the equivalent of 85% of your end-of-career salary for each year of retirement. For example, let’s say you make $80,000 per year at the end of your career. You will therefore need approximately $68,000 per year in retirement, or a total of $1,360,000 for all 20 years. The average Social Security monthly retirement payment is only $1,334.21. This comes out to just $16,010.52 per year, leaving you $51,989.48 short each year.
Budgeting Your Life with Your Finances
Saving for retirement shouldn’t mean compromising your dreams and goals in your 20s. By creating and utilizing a budget, you can balance your financial responsibilities (saving for retirement, student loan payments, rent, etc.) with the things that matter to you (buying that engagement ring, backpacking across Europe, finally buying food other than ramen, etc.). To kick start your budget, you can utilize the Spending Plan Worksheet that can be found at www.k-state.edu/pfc/budgeting. For more hands on help with saving for retirement or budgeting, feel free to set up an appointment with a peer financial counselor by going to www.k-state.edu/pfc/services. By making the choice to start saving for retirement today, you will greatly increase your wealth, opportunities, and lifestyle in the future.
Sources:
http://www.cheatsheet.com/money-career/3-big-benefits-of-saving-early-for-retirement.html/?a=viewall
Jillian Taylor
Peer Counselor III
Powercat Financial Counseling
