So you are fresh out of college and just got your first paycheck. Chances are contributing to your retirement scheme isn’t at the top of your list of expenses right next to student loans and next month’s rent. However, do not think of retirement contributions as expenses. They are investments! No matter how small the sum, it is the consistency of these investments that will yield rewards and cushion your years in retirement.
Most of us look forward to retirement and the idea of spending our golden years in leisurely bliss. However, there is a side of this that we often negate to consider. How will we fund this idyllic bliss? We forget that these golden years may be filled with increased health costs and unforeseen expenses.
In a constantly changing economy security is very important. So here are a few reasons to start saving today for retirement:
Contributions offer a tax break
You may choose to contribute to a 401(k) plan where your contributions aren’t taxed up front but your earnings and withdrawals are fully taxable or you may choose a Roth IRA where you do not get an initial tax break however your earnings and withdrawals are tax free. Other Individual Retirement Accounts are also options which allow you to make tax deductible contributions. Whichever method you choose, saving for retirement is stashing away tax free income.
Starting early, even with small amounts, gives you larger returns.
Retirement accounts work by compounding interest. This means that the interest you earn this year is added to the principal and your next year’s interest is calculated based on the principal amount plus the interest you earned in the previous year. For example if you contribute $5,000.00 this year at an interest rate of 5% per annum at the end of this year your account balance would be $5,250.00 but after 30 years that $5,000.00 would have matured into $21,609.71. In contrast, that same $5000 would only mature into $10,394.64 had you been saving for 15 years. The magic of compound interest is in longevity, not in the amount.
Your contributions are only a percentage of the income you’re used to spending.
If you retire at age 65 you may have at least 15 to 20 years in retirement. Your retirement contributions would have been up to 20% of your monthly income and had you started saving at age 40 for 20 years on retirement you would be getting that 20% of your monthly salary with a bit of interest for the next 20 years. Your lifestyle would have to drastically change to accommodate this decrease in income. Starting your retirement savings at age 20 means you get 40% plus there has been an extra 20 years to allow the magic of compounding interest to work.
Whether you choose to begin the day you get your first paycheck or you’re in your 30’s and haven’t started saving yet. It is never too soon to start saving for retirement. You don’t want to have to play catch up in savings ten years before retirement or even worse, have to delay your retirement plans because you find you cannot afford it.