If you are in your 20s (or even your 30s!), retirement probably feels a looooong way off. So starting a retirement account is probably not at the top of your to-do list. But starting a retirement savings plan early on is a great way to set yourself up for a successful retirement. No matter what your age is, now is the time to get serious about saving for retirement.
Now is the perfect time to start saving for retirement, and these are our top four ways to get started.
Why should I start saving for retirement early?
With so many expenses in our day to day lives, you may be wondering why retirement is so important to prioritize. But starting early is the best way to ensure you will have a successful retirement.
You can benefit from compound interest
Compound interest will help you grow your retirement account more than anything else. When interest is compounded, the accumulated interest will earn you interest as well, not just the principal that you invest. This creates a snowball effect for your savings.
If you initially invest $100 at 10% annually, it will be worth $110 by the end of year one. But in 30 years, even with no additional investments, it will be worth $1,744.94. And that’s the magic of compound interest.
You can get into a good savings routine
By starting a retirement fund early, you can get into a good savings routine. Creating space in your budget for a retirement savings fund will make saving second nature to you. This also means that should an emergency come up and you take a few months off from savings, it won’t completely throw you off of your savings track.
You will be more protected from market risk
When you invest in retirement funds, you are actually investing in the stock market. While you have some control over the amount of risk that you are taking, the stock market is inherently slightly unreliable. But if you invest early, you will cushion yourself a bit. If you have any short term losses, you can ride them out over time.
How much should I be saving for retirement?
How much you save for retirement can vary from person to person. Experts generally suggest saving 10%-15% of your annual pre tax salary. If you are a higher earner, you should aim for closer to 15%. If you are a lower earner, you can aim for closer to 10% as Social Security may replace some of your income.
But to get a more exact amount for your retirement savings goal, you can calculate your savings goal yourself.
Calculate your expected expenses
Go through your budget and come up with a rough estimate for how much you will need to live on each month. Start with your current budget, and estimate how much and what will change for you in the future. Then add on anything that you might want to do in retirement – if you want to join a country club or travel more, include that in your expenses. When you determine your monthly expenses, multiply by 12 to get your annual expenses. This will give you an idea of how much you will need per year to live comfortably. Depending on the age you plan to retire and your life expectancy, you can get a rough idea of how much you will need to save.
Use a retirement calculator
A retirement calculator can help you determine if you are on track for savings. By entering your pretax income and savings, it can give you an idea of how much you will need and how far off you are from your goal.
How can I start saving for retirement now?
No matter what your goal is, the earlier you start saving, the better off you will be. So here are our top tips to start saving for retirement.
Contribute to your 401(k) plan
If your company offers a 401(k), you should start contributing immediately. If your plan allows you to contribute pre tax dollars, this can help you to build your nest egg much faster. And if your employer matches your contributions, that is essentially free money. So be sure to contribute at least as much as they are willing to match.
Open an IRA
An IRA, or Individual Retirement Account, is another type of account that you may consider opening. There are two types of IRAs, traditional IRAs and Roth IRAs. A traditional IRA allows Investments in a traditional IRA may be tax-deductible, and the earnings can grow tax-deferred until you make withdrawals. You can access it at 59 ½ and it will be taxed as income upon withdrawal. A Roth IRA allows you to contribute after tax dollars that grow tax-free. You can make withdrawals at 59 ½ that are tax free and penalty free. In general, traditional IRAs are recommended for people who expect to be in a lower tax bracket when they retire, while Roth IRAs are recommended for people who are in lower tax brackets today.
Find room in your budget to contribute more
Go through your budget and see if there’s any cutbacks you can make to start saving more money.
- Canceling unused subscriptions.
- Cutting back on dining out and entertainment.
- Buying generic brands at the grocery store.
- Refinancing your car loan (refinancing your car loan to a lower rate can loosen up a lot of money every month and make a big difference in your budget).
Extra money that you save every month can be allocated to your retirement fund. You know how much money you want to save, so use that number to determine how much you should be saving every month or every paycheck.
Consider delaying social security
For every year you delay receiving social security, you can end up increasing the future amount you receive. Age 62 is the earliest that you can start receiving Social Security, but the more you delay this (up to age 70) the more you increase your future payments.
Those are our top tips for starting a retirement fund.
It’s never too early to start planning for retirement. The earlier you get serious about savings, the more of an impact it will have on your future. The key is to find extra ways to contribute to your fund and pick a fund that is right for you.
An easy way to free up more money for savings is to refinance your car loan with Auto Approve. By refinancing your car loan to a lower APR, you could be saving hundreds of dollars per month. And all of this can add up to a more comfortable retirement. So if you are overpaying on your car loan (and believe us, you probably are) contact Auto Approve today to see how much we can save you.