How Early Is Too Early to Save for Retirement?

February 13, 2018
1713 Views

Retirement living is becoming more expensive, making it essential to save for retirement early. Many financial experts believe that a savings plan should begin from the age of 20 years onwards, which is significantly earlier than what most people think.

Any young person who has just begun employment should consider the benefits of entering a retirement plan early.

The Retirement Basics of Starting Early – A Little Can Go a Long Way

Many young people assume that retirement savings in their 20s will be unaffordable. Low wages in entry-level jobs, student loans, and increasing living costs, can all make it seem like saving is not a possibility.

The reality is that even with a small $50 retirement contribution, there will be benefits to a long term retirement fund.

A $50 monthly contribution amounts to $600 over a full year, and $3000 over a five-year period. For someone who starts saving from the time they are 20 years old, this can result in $6000 in retirement savings by the time they are 30. Of course, this assumes no interest generated, when in most cases compound interest would lead to a figure of almost $10,000.

$50 is a reasonable monthly contribution, even for those who are limited financially. If savings can be increased to $150, then the ten-year savings total (with compound interest) will be closer to $30,000. It is also reasonably to expect that income will increase during the ten-year period, which would lead to even higher figures and more interest generated.

It Costs More to Start Saving Later

Young people don’t like to think about retirement. It can be hard to conceptualize when beginning a career. This is something that needs to change, because the cost of waiting is much higher than making sacrifices to save early.

When it begins later, there will be less total interest generated. This means making larger contributions with smaller returns. A simple rule of thumb to follow is to save 4% of an annual salary. On a $30,000 (after tax) yearly salary, this equates to $12,000 in savings per year before any compounded interest. When considering these figures in the long term, $12,000 per year would mean up to $150,000 saved over a period of 30 years. Again, this doesn’t take salary increases into account, and it doesn’t factor in any employer contributions. The real figures will be much higher, allowing for more financial freedom and stability in retirement.

Starting early is important, and it’s essential that contributions are made from the moment formal employment begins.

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