One of the most important things you can do for your future is to plan for your retirement. Retirement can be gloomy for both you and your family if you are not adequately financially prepared. Some people assume you can start planning later, but don’t be caught off guard.
Retirement may seem like a lifetime away while you’re in your 20s, 30s, or even 40s – something you may not need to plan for just yet. But is it ever too early to start planning for a financially secure future? Certainly not. The best time to start planning for your retirement is the day you receive your first paycheck. The second best time is today.
If you start saving for retirement when you’re 25, you’ll have plenty of time to develop healthy habits and compound your savings.
Common Retirement-Planning Misconceptions
Anyone approaching retirement age will tell you that the years fly fast, and that if you don’t start saving early, establishing a substantial nest egg becomes more difficult. As time goes by, you’ll probably accrue other costs, such as a mortgage and a family.
You Can Sell Your Home to Fund Your Retirement
You may believe that one day you will be able to sell your home and use the earnings to fund your retirement. However, you won’t be able to put all of the money you receive for your house into investments that will provide you with a monthly income. You’ll still need a place to live, which you’ll most likely have to buy or rent, depleting your savings quickly.
Your Have Less Everyday Expenses When You’re Older
People frequently assume that their daily spending will be significantly lower as they get older, but according to a benchmark study, 48% of retired people’s expenses exceed their wages. Medical and healthcare costs, in particular, are expected to skyrocket. People want to retain their lives and do things they didn’t have time for before, such as travel, but it all costs money.
Investing Conservatively is Just as Good
One of the biggest mistakes you can make for your retirement is to invest too conservatively, according to Jeanette Marais of Allan Gray. “Cash in money market funds is an example of conservative investments. A significant portion of your money should be invested in stocks.” “Over time, these investments outperform other asset groups.” A balanced fund, according to Jeanette, is an excellent choice because your money will be divided across multiple asset classes. “Shares can be invested up to 75%,” she explains.
Why You Should Start Planning for Your Retirement Early
The sooner you begin investing for retirement, the better off you will be. However, you might not be able to do it on your own. It may be important to employ a financial advisor to assist you, especially if you lack the necessary knowledge to manage the retirement planning process.
Compound Interest Is Your Friend
The strongest incentive to start planning for retirement early is compound interest. If you’re not familiar with the term, compound interest refers to the process through which an amount of money grows exponentially over time as interest builds on itself.
To get down to basics, let’s start with a simple example: Let’s say you put $1,000 into a safe long-term bond that pays 3% annually. Your investment will increase by $30, or 3% of $1,000, at the conclusion of the first year. You have $1,030 currently. However, you’ll receive 3% of $1,030 the following year, which implies your investment will grow by $30.90—not much more.
Let’s jump ahead to the 39th year. You can see that your money has grown to roughly $3,167 using this handy calculator from the US Securities and Exchange Commission’s website. By the 40th year, your investment has grown to $3,262.04. That’s a $95. difference over a year.
You’ll notice that your money is rising three times as fast as it was the first year. This is the miracle of compounding earnings. If you invest the money in a stock market mutual fund or other growth-oriented assets, the savings will be considerably greater.
Saving a Little Early vs. Saving a Lot Later
You may believe you have plenty of time to begin putting money down for retirement. That may be true, but why wait until tomorrow to start saving when you could start today?
Take advantage of any employer-sponsored retirement plans you may have. Most employers will match a portion of your contributions, giving you an additional boost to your savings. You won’t even know your money is being saved with pretax deductions.
You can also save money outside of your workplace. To emphasize this point, consider another instance.
To emphasize this point, consider another scenario. Let’s imagine you start investing in the market with $100 per month and earn a positive return of 1% per month or 12% per year over the course of 40 years. Your friend, who is the same age as you, doesn’t start saving until he’s 30 years old, and then invests $1,000 each month for 10 years, averaging 1% per month or 12% per year compounded monthly.
In the end, who will have more money saved?
Your acquaintance will have put aside approximately $230,000. Your retirement fund will be somewhat more than $1.17 million. Despite the fact that your friend was investing more than ten times as much as you in the end, compound interest makes your portfolio much larger.
Remember that the longer you put off planning and saving for retirement, the more money you’ll need to put aside each month. While it may be simpler to enjoy your 20s with your entire paycheck at your disposal, saving money each month will become more difficult as you become older. You may even have to postpone your retirement if you wait too long.
How to Start Retirement Planning
Has this piqued your interest enough to make you consider your retirement funds earlier than you planned? If that’s the case, congratulations! The next step is to create a basic strategy that works for you. Here are some practical steps you may take to improve your situation almost immediately:
Start saving right away: Make a tiny goal for yourself, even if it’s only putting $5 in a jar next to your bed. Make sure whatever it is is little enough to be repeated and become a habit.
Utilize your company’s 401(k) plan: If you’re not, you’re throwing money away. Many businesses will match your contributions up to a percentage of your salary.
Try your hand at aggressive investing: As noted by Springer, you want to make as much money as possible while avoiding risk. Consider bonds: they’ll return around 5.4 percent per year, which is deemed “risk-free” and just ahead of the inflation curve.
Pay off your loans and remain out of debt: Significant debt, such as student loans or credit cards, can sometimes get away from us. The important thing is to pay these off as soon as possible. Live frugally for a period and get out of debt as soon as possible. Then work to keep it that way.
When you’re young and have fewer responsibilities, it’s easier to save for retirement.
You can plan your retirement, but if you lack the expertise, an investing advisor can help you prioritize your objectives.
Compound interest, or the interest received on your initial investment plus the earnings reinvested, is a fantastic reason to begin saving early.
A Roth IRA can be funded using after-tax earnings, while a standard IRA can be funded with pre-tax dollars.