It's never too early to start saving for retirement. Yet, in a recent survey by Edward Jones, 23 percent of those 18-34 polled said it was too early to start saving for retirement.
The decision to delay socking away money for retirement is indeed a huge mistake. Here's a look at the tremendous benefits of saving for retirement with your first pay check.
Time value of money
Compound interest has been called the eighth wonder of the world. Compounding returns over long periods of time have a powerful effect on wealth accumulation. For example, a 35 year-old who saves $500 per month for 30 years will accumulate $612,000 for retirement by age 65, assuming a 7 percent annual return. However, if she had started saving the same amount each month at age 25, instead of 35, and the stopped saving at age 45, she would accumulate $1,041,000, despite saving for 10 fewer years, explains Jeff Seavey, a senior vice president at SunTrust Private Wealth Management.
Habits are hard to break
The earlier you start, the earlier your habit forms, making the “discipline” of saving second nature, points out financial strategist Jeanne Brutman. Saving becomes a healthy routine. Say every pay period you put aside a certain amount of dollars. Then you go a step further, every time you get a salary increase you put the majority of it toward retirement. This kind of “habit” will add up to big time retirement dollars.
You can take more risks
By beginning early, you can be more aggressive in your allocations and ride the benefits of those gains even in a volatile market because time is on your side, points out JP McDermott, a financial advisor with MassMutual.
Avoid “catch up disease”
You don't want to be like the Boomers who have “catch up” disease. “They started saving later so they have to work longer and think they have to invest more heavily to 'catch up',” warns Brutman. Take the pressure off by giving yourself more time for your money to grow.
Later may not be easier
Saving will be much easier if you begin putting a portion of your income aside from an early age. It is very difficult to begin saving after getting accustomed to a certain lifestyle. Start out by having 10-15 percent of your income automatically transferred into an investment account. Your savings will grow as your income goes up and you won't even notice, says Seavey. Furthermore, you never know if circumstances later in life will prevent you from saving, or if unexpected expenses will arise, better to save as much as you can when you have less obligations like children, or that money pit called a house.
Take advantage of a Roth IRA
For young people with modest incomes, Roth IRAs are a great option, says Seavey. Every dollar you contribute to a Roth, up to the annual maximum, will grow tax-free forever and can be withdrawn in retirement tax-free, provided you are 59 ½. The tax savings are significant and every tax dollar saved is a dollar you'll have for retirement. The ability to contribute to a Roth IRS is restricted to certain income levels, so take advantage of it while you're young, because you may not be able to contribute later when you're making more money.
Likewise, there are tax advantages of saving through a 401k. “That money is going in tax advantaged. When my daughter told me that she didn't make a lot of money and her employer did not match, I encouraged her to still contribute to get that compound savings benefit rolling. Evening putting in as little as $50 per month, her take home pay will only be reduced by a few dollars because of the tax deduction her $50 represents,” explains McDermott.
Stay the course
Once you get started, keep going. Don't get derailed. “I knew a young lady that switched jobs. Instead of doing the sensible thing and either moving her 401k money to the new 401k plan available or an IRA, she just had to have a new bedroom set. She cashed out in her 40k, paying not only the income tax due, but also a 10 percent penalty on top of that. It wasn't a smart move,” says Brent Lindell, a financial advisor with Savant Capital Management.
Similarly, resist the temptation to borrow against your plan. “Many young savers may be tempted to borrow against their retirement plans. By doing this, you may miss out on growth potential,” says Chuck Cornelio, president of Retirement Plan Services at Lincoln Financial.
Quite simply, delaying saving likely delays retirement.