Getting a Head Start on Retirement SavingsComment May 8, 2015 by Cait Klein, NerdWallet
With the financial demands of post-graduation life, including finding housing, building credit and, for many, dealing with a humongous burden of student loan debt, it’s no wonder saving for retirement isn’t a priority for most millennials. In addition to wrinkle-free skin and a full head of hair, young adults have the most valuable asset around: time.
You may have another 45 years before you consider retiring, but don’t let that be an excuse to delay saving. All that time is on your side only if you start saving now. Here are a few things young adults can do to start preparing for retirement as they move into financial independence.
- Take advantage of compound interest. Remember, compound interest is your hidden ally. If you put away $1,000 a year from the ages of 20 to 30 into an account earning 7% annually, by the time you’re 65 you’ll have accumulated $168,515 from just 11 years of savings. Imagine that your best friend doesn’t start a retirement account until he’s 30, but he saves $1,000 a year, earning the same 7% a year, for the next 35 years straight. When he’s 65, his account will have only grown to $147,914, even though he contributed three times as much money as you. That is the magic of time coupled with compounding returns. Putting away just a little bit each month, from $50-$100, can truly add up.
- Get the boss to help. If your employer offers to match contributions to a retirement savings plan, make sure to capitalize on it. When looking at jobs, an employer match to a 401(k) plan could potentially be more valuable than a higher salary when you take compound returns into consideration. Not contributing the full amount for an employer match is turning down free money.
- Open a Roth IRA. If you don’t have access to a 401(k) or are self-employed, consider contributing to a Roth individual retirement account, or IRA, at a financial institution such as Triangle Credit Union. While you don’t get an upfront tax deduction on money you put into a Roth IRA, all of your withdrawals, including any earnings, are tax-free once you reach the right age. This benefits anyone who expects to be in a higher tax bracket down the line.
- Know the end goal. A good rule of thumb in determining how big of a retirement nest egg you’ll need is to take 80% of your final salary and multiply it by the number of years you’ll spend in retirement. So if you expect to be making around $50,000 annually, and you plan to enjoy 20 years of retirement, a good goal would be to have $800,000 in savings. That’s an intimidating number now, but it’s easily attainable if you start with small monthly contributions when you’re young.
The most important factor in retirement success is to not touch those savings. As tempting as it may be, leave your retirement account out of sight and out of mind until you stop working. By planning ahead when you’re young and then staying disciplined as you grow older, you can look forward to a well-deserved retirement free of money worries.
Cait Klein, NerdWallet