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Saving Sooner Rather Than Later Is Best for Reaching Your Retirement Goals

Saving Sooner Rather Than Later Is Best for Reaching Your Retirement Goals

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.

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dbl118   |     |   Comment #1
"Quite simply, delaying saving likely delays retirement."

True, however delaying savings also delays the need for retirement, since theoretically you are spending more and enjoying your youth (alternative investing).

pearlbrown   |     |   Comment #2
dbl118, I disagree with your comment.  You might delay savings because you are burning through money like there is no tomorrow in order to enjoy your youth, but you are going to run a high risk of misery in your later years.   Health can change in the blink of an eye, family situations can change and result in additional responsibilities, jobs can disappear overnight.  

I enjoyed my youth tremendously and still managed to save for retirement.   I think the wise thing is to balance the enjoyment of the present with concern for the future.  You save money so you can weather the unexpected and also to help secure your future.    
Hoody   |     |   Comment #3
"assuming a 7 percent annual return"

Right, and this is found where now?

PS: not into any "investment" scheme's..... save that advice for the Cramerites.

Paoli2   |     |   Comment #4
Ms. Nash - Thanks for sharing the "Savings" info but I have to agree with Hoody.  Your article reminds me of so many others which encourages us to save and let's us know we should aim for 6 -7% yields to reach those high goals they come up with.  That was great for years ago when we could count on even 5% for CDs but why don't you make it clear in order to even hope for these goals, one has to go into the riskier investments like stocks etc.  I have had friends who saved for years and lost fortunes because they wanted those higher yields and unfortunately they were in the stock market.  

I am glad Ken allows you to share your articles with us but can you do some research and give us more information about how to make even 2.50% -3% in CDs and any other risk-free places you know of where we could put money in these bad financial times?  Remember you are writing your articles for people in 2012 so please give us information workable for these days.  Urging young people to start saving now is great but in this economy, the risks they have to take is very scary.  Whatever they can afford to save should always be put in "risk-free" investments, imo, so that 20-30 years down the line, it will still be there when they need it most.  With the world being in the chaos it is, and now all nations are tied together in some way, the safest stock of yesterday can be your downfall today, imo.  Our choices for saving are greatly limited by the problems in the world markets.  Just my opinion.
mak1118   |     |   Comment #5
Somebody young should have most of their money in the stock market.... a nice index fund and let the dividends reinvest. Look I'm conservative but you can't put your head in the sand especially if you have 40 or 50 years to go until retirement. Just know your risk and just reaching for yield is not always the answer but there is a place in every portfolio for risk.
mak1118   |     |   Comment #6
If you listen to Cramer, you're done.  If you want to invest in the market invest in VTI or SPY, just don't try to be a genius and buy the individual companies,imo. The index fund will always come back the individual stocks, who knows?
Hoody   |     |   Comment #7
@Paoli2 -- yup you sound like your on my train, sounds about right to me.


@Mak1118-- I guess I should have put in my age bracket, (65), no way do I listen to any Cramer da clown. or any of the other CNBC marketers, except maybe Santeli. I'm not Savoy enough to even mess with any "financial know it all",  I have nothing to deduct, never have, so anything that makes me spend money on some one's "expertise" is worthless to me. I saved just for the hell of saving back in the days when I never even bothered with interest rates, till later on I realized that even if i did take the interest and paid the tax I was still doing ok, so I started on CD's, have been doing this for going on 30 years, never had a IRA, 401K, or anything else, I do have my Army retirement, and my SS. I saved enough this way and by always living low and under my means that now I'm pretty used to it and don't need a lot. I and the tax collector own my house and cars, so all I have is the yearly property tax's.I don't have a cell phone, LCD TV, and still use dial-up ISP, smirks...... although I did 27 years active and Vietnam, I'm still healthy enough to go to the post gym every day and lift with the youngsters. :))
Paoli2   |     |   Comment #8
Gosh Hoody, you sound like a male version of "me"!  Good going for you!  When it comes to money, "I" am the only advisor I want and except for the info I can find on Ken's pages.  Take care and remember it's our pal on Va.'s beach's birthday today from what he posted.
dbl118   |     |   Comment #9

I am a teacher and save about 33% of my salary directly into retirement.  So I certainly live by and beyond the advice of this very simpleton assessment.

My point was it's more complicated though.  There is an opportunity cost for saving.  You talk about burning through savings, but there is the possibility that somebody is spending on things that have value to them.  Whether it's a trip, a family, a charity, a new T.V., it may be worth it.  Money has inflation, but so do memories.  Go on a trip in your 20s, and have 60 years to be influenced on it and reflect on it, wait until your 40s and you have less time.  You also run the risk of dying at 39 and never getting the trip if you wait.

Paoli2   |     |   Comment #10
dbl118:  Your post touched a special place in my heart.  I knew the day I married I would be willing to give up everything to save for our later years but I had a yearning to travel that could not be ignored.  I penny pinched for these trips and learned how to travel budget wise and still be able to save.  I look back now and we were able to see every place I desired in the US, Hawaii, Carribean, and much of Europe.  If I had waited to do this in my later years, I would never have been able to due to an unexpected medical problem which hit me out of the blue.  What I am trying to say is that we need to save but if someone has a special desire to do something in their youth, imo, DO IT!  If you don't, all the money in the world will not take that ache out of your heart because you never got to see the magnificent places we have on this earth.  When I am in pain, I can now look at the photos on our apt walls and remember the days I was able to travel.  You can't buy memories, you have to make them!  So do save, but don't take it for granted that when you retire you will be well enough to do all the things you hope to use the money for.  You CAN do both!  You just have to discipline yourself to do them.
51hh   |     |   Comment #11
Certainly a lot of words of wisdom here. 

Well-said; Paoli2, dbl118, and others.  It is indeed difficult for a saver like me to spend money on those "worthy" causes (stated by dbl118 and paoli2).  I am ok with daily necessary spendings.  However, the habitual frugality prevents me from spending those extra money even it may make my wife and/or me joyful. 

How do you folks recommend that I overcome such reluctance?  I mean: I know all the rationale and perspectives, but it is extremely difficult for me to practice them.

Paoli2   |     |   Comment #12
51hh:  I truly am the Queen of Frugality and Saving.  However what good does it do to have millions of dollars in the bank (which "I" don't!) and be too sick or too old to do anything with it.  God Forbid something should happen to your wife, would you be able to hug your bank book?  Would you be sadder because you didn't take her to Hawaii or Europe like she always wanted or just splurge on that "something special" that you know will make her or yourself enjoy life more?  Life is about living too. 

When I was young I saw myself as invincible and felt I could do everything we wanted later in life.  However, I looked death in the face about 3 times in my life and when I was given the miracle of life back again, I knew I had to change my thinking.  I still am frugal, only buy what we can pay cash for and even with the trips, never took one trip I didn't save ahead for.  So what that I didn't have as gorgeous a home and car as others.  You have to prioritize and be willing to settle for giving up certain things so you can still save and enjoy spending for that which makes you and your wife happy.  I don't care about fancy cars, clothes or jewelry.  My passion was for traveling and luckily my DP had the same desire.  He just had no idea how I intended on getting us to all the places and save money for retirement too.   It's called self-discipline.  My main goal was to see Switzerland, London, and Paris.  Guess what?  Made it!  So set yourself a goal and find out what it is most you AND your wife want to spend some money most on.  Save up for "that" goal and keep the money seperate from retirement savings.  Best of luck to you and enjoy whatever it is you and she want most while you still can. 
pearlbrown   |     |   Comment #13
dbl118, perhaps I misunderstood your comment #1.  You said in part, "delaying savings also delays the need for retirement, since theoretically you are spending more and enjoying your youth (alternative investing)", which I read as:  "if you are enjoying your youth (alternative investing) then you don't need to retire", hence my comment about burning through savings and facing misery in your later years. 

In fact, I completely agree with you about the wisdom of spending money on things that are of value to the individual for precisely the reasons you state.  Many things can be lost (health chief among them) or no longer possible (due to circumstances, politics, or other pressures) later, but memories are priceless.  I understood the opportunity cost of saving and even when young tried to make wise decisions in that regard.  Education (formal or informal), travel, providing for the seniors in my family and supporting worthy causes have influenced the way I see the world and have been/continue to be priorities.    New TVs, new cars, the latest designer items, a palatial home and the latest gadgets... not so much.