When should I start saving for retirement?
Saving for retirement: when should I start?
An old saying goes something like this: “The best time to plant a tree was 20 years ago. The second-best time is now.” And so, it is with saving for retirement. If you haven’t already been setting aside money for the future, today is the day to begin.
In the past, pension plans funded by employers were seen as the primary vehicle for retirement income. Today, the picture is quite different, with 401(k) and 403(b) plans largely replacing pensions. This change, along with the introduction of the IRA, has shifted much of the planning responsibility from the employer to the employee. This is a good thing because it puts you (and not someone else) in the driver’s seat when preparing for your retirement. And since you’re in the driver’s seat, you can decide when to press the gas pedal and get things moving.
Like with a tree, retirement savings balances don’t shoot up overnight. They grow over time. Which means there’s an actual cost to waiting. Let’s say you’re 30 years away from retiring and decide to begin setting aside $200 per month into an account averaging 8% per year. In 30 years, your balance will be about $290,000. However, if you wait five years to start doing this, your savings balance will be about $190,000 at the time of retirement. Ouch!
Even though you invested just $12,000 less in the second scenario, it costs you about $100,000. This is the time value of money and the power of compound interest, which Einstein called “the eighth wonder of the world.”
If you’ve already begun saving regularly, keep up the excellent work! And periodically consider whether the amount you’re setting aside is consistent with your future goals.
If you’ve been delaying, don’t be discouraged. You still have a choice before you— start now or delay further. You may need to set aside a higher amount each month to reach your retirement goals, but no matter what you can save, starting today can produce tremendous returns compared to waiting even a few years.
As you begin (or continue) saving for retirement, here are some other important considerations:
Social Security. The 2022 Social Security Trustees report highlights that retirees will receive only 77% of their full benefits beginning in 2034 (less than 12 years away!). Social Security will continue to provide benefits beyond 2034, but the level of benefits is in question. This underscores the priority of saving for retirement and doing so sooner rather than later.
The rule of 72. This is a simple way to estimate how long it will take for an investment to double. For example, assuming an interest rate of 6%, an investment would take approximately 12 years to double (72 / 6 = 12). This rule assumes no additional contributions.
Traditional (pre-tax) vs. Roth (post-tax) retirement account contributions. Is it better to pay taxes now or later? The tradeoff can be summarized as greater savings growth (pre-tax) versus less tax liability (post-tax). It’s often best to do both, and a trusted financial advisor is an essential resource in evaluating the options.
Catch-up Contributions. Employees age 50 and older can contribute an additional $7,500 to their tax-deferred retirement plan (above the standard $22,500 limit). This is a fantastic option for those who started saving late and have the means to contribute more.
That’s a fair bit to chew on, but hopefully, you caught the main point. When it comes to saving for retirement, there’s no better time to start than the present.