When you are in your 30s and 40s, retirement can still seem a long time away. You have other priorities such as saving for a house, purchasing a car, paying off your student debt, and saving for your child’s college. However, there are several benefits to starting a retirement fund early. Fortunately, many employers offer some type of retirement savings plan, so you can start saving as soon as you start earning a salary. Here are 6 reasons why you shouldn’t delay your retirement planning.
1. Higher return on your investments
When you start saving for retirement early, you have more time for those investments to grow and benefit from compound interest. Compound interest is the interest you earn on your principal sum plus previously accumulated interest or earnings. This can add up to thousands of dollars over time. This compound interest calculator is a great way to see how powerful compound interest can be if you start retirement planning early.
In the example below, if a 30-year old professional earning $80,000 salary starts investing 10% of her salary through her 401(k) at 30, she can accumulate close to $1.5 million by the time she’s 65 years old. (We assumed a 3% salary raise each year and an annual average of 6% investment returns).
2. You can make more aggressive investment choices
The investments with the highest potential rate of return are generally the ones that carry the highest amount of risk. When it comes to your 401(k) or another retirement account, generally, the younger you are, the more risk you can take with your investments. This is due to having more time to recoup if you have any losses. As you get closer to retirement, it is generally better to shift towards a more conservative strategy.
While riskier choices can mean higher potential returns, they can also mean large fluctuations in value. It’s important to think about your own risk tolerance when you create your investment portfolio.
3. Retire sooner
The normal age to retire is 65 but you may want to retire sooner than that. When you have paid off all of your debt and have saved adequate money, then you have the option of retiring early. By understanding the importance of retirement planning and executing an investment strategy, then you may reach your retirement goal earlier in life.
Many retirees go on to pursue new careers or hobbies that they didn’t have time for when they were tied to a 9-5 job. The dedication to saving for retirement in your early years can mean more flexibility and freedom in your later years.
4. Retirement can mean reduced housing costs
When you retire, you no longer need to live close to work, or worry about the cost of commuting to work. You will have more freedom to choose where you want to live. Smaller rural towns often have cheaper real estate than in the metropolitan cities. This may mean that you can move to a cheaper property and pay off any remaining mortgage.
5. Take advantage of employer contributions
If your employer offers to match your 401(k) contributions, then make sure you contribute enough to take full advantage of the match. For example, an employer may offer to match 50% of employee 401(k) contributions, up to 5% of your salary. This means that if you earn $70,000 a year and contribute $3,500 to your 401(k), then your employer would contribute another $1,750. This is essentially free money and can add up to a lot over your working life. If you start contributing to a 401(k) with an employer match at the start of your career, then this is going to significantly positively impact how much you have for retirement.
6. Social Security isn’t guaranteed
The average social security is around $1,500 per month. That may not be enough money to cover your expenses and to live comfortably during retirement. By 2034, all of the current money in the program’s reserves could be depleted and the benefits could be cut by 22%. This may change but it’s important that you have your own retirement savings so you aren’t relying on social security.
When should I start retirement planning?
The simple answer is: as soon as you can. That’s because the sooner you start saving, the more time your money has to grow. One of the most common excuses people make to justify not saving for retirement, is that they are still young. Anyone who is nearing retirement will tell you that the years suddenly go by and building a retirement nest egg is much harder the longer you delay saving.
Almost 40% of Americans have less than $5,000 saved towards retirement. This is going to lead to a lot of financial stress as they near retirement. Starting early can reduce this stress and lead to a happier retirement.
What are the first steps to retirement planning?
- Determine how much money you want when you retire. This will largely depend on the type of lifestyle that you want to live. If you want to live a quiet life in the country then you will need less than if you want to spend your retirement traveling around the world.
- Prioritize your financial goals. Retirement is probably not your only savings goal. This is where a fiduciary financial advisor can help. It’s important to have a broad look at your financial goals and determine how you are going to achieve them all.
- Decide which retirement savings plan is best for you. In general, the best retirement plans have tax advantages and additional savings incentives, such as matching contributions.
This is the broad approach to retirement planning. If you want to create a more detailed analysis for your retirement, then working with a certified financial planner may be a great option for you.
Here are some common retirement plans. We have discussed them in detail so you can begin to think about which one may be best for you.
Start retirement planning early
When it comes to retirement planning, it’s never too early to start saving. Starting early means that you have adequate time to plan, have an allowance for making mistakes, be more financially stable, earn higher returns, and retire early to live the life that you want. Retirement can be a simple process if you plan ahead. Are you on track for your retirement? If you want to learn how we can help with your retirement planning, schedule a complimentary discovery call today.
Alvin Carlos, CFP®, CFA is an investment advisor and fee-only financial planner, in Washington, D.C that works with clients across the country. He has a Master’s degree in International Relations from SAIS-Johns Hopkins. Alvin is a partner of District Capital, a financial planning firm designed to help professionals in their 30s and 40s achieve their financial goals through smart investing, reducing taxes, retirement planning, and maximizing their money. Schedule a free discovery call to learn how we can help elevate your finances.