When you are in your 20s, you would think that you do not have to start saving for retirement. Although it is true that retirement is a long way off, that does not mean you should procrastinate. One of the things that you need to do while you are still young is to set your finances right from the start. It is better to develop the habits while you are young instead of trying to correct the bad ones when you are older. The longer you get used to a habit, the harder it will be to change it. If the habit that you develop is a bad one, it could jeopardize your financial future. But if it is a good habit, like saving for retirement, then it can really set you up for a bright future.
According to an article published in 2013 on CNN.com, 20 million senior, or almost 50% of the elderly population, are left financially wanting. They are forced to live on a retirement income that is close to the poverty line. This report came from the Economic Policy Institute.
One can assume that some of these retirees are relying on their Social Security for their retirement income – which according to the article, is around $1,230 only. If that is all that you can spend, then you will really be forced to live in poverty.
Some people may have saved up for retirement in an account that is similar to the 401(k) but the statistics show that what they have is probably not enough. It is one of two things. It is either they had to make an early withdrawal from their retirement account or they started out late in their saving efforts.
If you can help it, you need to start saving for retirement as soon as you can. That way, you can avoid being part of the statistic of retirees who are living in poverty.
3 reasons why it is wise to start on retirement savings during your 20s
You may be wondering, why do you have to start as early as your 20s? Couldn’t you just start when you reach your 30s? It would be great if you have at least one decade to spend your money recklessly. You deserve to enjoy what you are earning while you are still young.
It may seem like a fair deal – to splurge when you are still in your 20s and become all serious about saving for retirement when you reach your 30s. It is possible for you to do that and still have enough to retire on. However, there are three important reasons why you still have to start while you are in your 20s.
You can maximize the benefits of compound interest.
Probably the most obvious reason to start as early as you can is because of the compound interest. This is when the interest is added to your principal deposit so it will also earn interest after it is added. So if you save $100 with an interest of 3%, you will have $103 when the year ends. In the second year, your interest will be $3.09 because the $3 interest amount will also be computed as part of the principal that will earn interest. This allows your savings to grow at a faster rate. Imagine how much growth your money will get if you save for retirement for 40 years (when you start at age 20) as opposed to 30 years (when you start at age 30)? The compound interest may be your ticket to an early retirement.
You have less financial responsibilities.
Unless you decide to get married at a young age, this is one of the benefits of saving for retirement while you are in your 20s. If you have no plans of settling down just yet, you may want to grab this opportunity to make huge deposits towards your retirement fund. Before you have to save up for your wedding or before you are saddled with child-related expenses, you need to think about your savings. When the time comes for you to settle down, you should have a lot of savings already. In case you are forced to stop contributing to your retirement to pave way for the expenses in your household (e.g. childbirth, mortgage payments, etc) you need not worry about your retirement fund. You can rely on the compound interest to keep on growing your money even as you stop your contributions.
You can set your financial decisions to benefit your future.
An article published on AARP.org explained how knowing how much to save will help affect how you spend on a daily basis. According to the financial analyst, sitting down to plan your finances and specifically getting what you need to save up for in retirement is very powerful. When you know your target, it is easier for you to align your financial decisions to meet your goals. Developing the habit of saving early on will help you practice the right financial behavior as you grow older.
These three reasons should convince and motivate you to not waste any moment longer. Saving for retirement is not dictated by age. It will always be more beneficial if you start as early as possible. So why not start the moment you land your first job?
Tips to maximize what you will save for retirement
There are several ways to maximize your savings for your retirement fund. If you follow these rules, you might just be able to afford an early retirement without compromising the lifestyle that you want to have.
Here are some tips that you may want to use in order to save as much as you can.
- Know how much you will need. Although you have Social Security checks in retirement, it is oftentimes not enough to cover what you need. According to the website Retirement-USA.org, 9 out of 10 young adults (aged 18 to 29) understand how important the Social Security program is when they retire. However, they doubt if it will be available when they retire. Given that, you need to keep yourself from relying solely on your Social Security. Start by calculating how much you need to retire so you can figure out your saving target. You cannot just calculate how much you are spending now. You need to factor in a lot of things like your priority expenses when you reach retirement and of course, the inflation rate. You should also consider the age by which you will retire and the average life expectancy.
- Forecast your expenses. It is difficult to forecast your expenses accurately but there are factors that you can consider to help you do your estimates. For instance, you can check the list of expenses that your parents or grandparents are living with. Concentrate on their health-related bills because any genetic illnesses may become your problem in the future. You can also decide exactly where you want to live. Some states are cheaper than others. If you choose to live in an expensive neighborhood, you may have to work harder in saving for retirement. You should also consider if you will be bringing debt into retirement. That can be a problem if you cannot get rid of debt in time.
- Research your options. The next tip is to research your options. You need to know the available retirement accounts that can hold your savings. Opt for the ones that will provide you with the highest returns. If you are employed, you can take advantage of your company’s 401(k). You can also start investing on your own. In case you have enough money, it is advisable that you invest in real estate – specifically rental properties. This investment can give you a great retirement income and may even allow you to go for an early retirement.
- Practice credit management. Now debt should not have any room in your retirement. But that does not mean you should shy away from debt entirely. If you need to buy a house, the best way to do that is to get a home loan. You also need to keep your credit score up so you can avail of the best terms in some financial transactions. What you need to do is to practice how to manage your credit properly. If you have existing debts, like student loans, you need to create a plan that will pay them off as fast as possible. If you have future loans, you need to be wise about your choices and you need to borrow only what you can pay off. The less of your income that has to be allocated to debt payments, the more amount you can save for your retirement.