With all of that talk about Social Security benefits rapidly running out, it’s now more important than ever to start thinking seriously about saving for retirement. Of course, the younger you are, the more difficult it can be to wrap your head around the idea of setting money aside that you won’t use for many years. Jim Barker of Barker Insurance Services is a personal financial representative who has helped his fair share of clients establish and subsequently achieve their retirement goals. One question that Barker often gets asked is: At what age should a person start saving for retirement? The answer, according to Barker and many other such professionals in his field, is “as early as possible.”
Believe it or not, the right time to start putting money aside for retirement is the moment you start earning a steady income. The logic is simple: The sooner you begin saving for retirement, the more time your money has to grow. By getting started early on retirement savings, you’ll be able to take advantage of compounding, which works by taking the money that you’ve made from a particular investment and reinvesting it so that it can generate an even greater profit. It might sound confusing, but it’s actually a rather simple concept. If you decide to put $5,000 into a 401(k) account and that investment earns 10% interest per year, then after a year, your initial $5,000 contribution will be worth $5,500. When you go to invest that money the next year, you’ll have $5,500 to work with. So if your interest rate remains the same, then you’ll have $6,050 at the end of year two. The thing about compounding is that over time, it really enables your money to grow by allowing you to reinvest your interest and use it to earn even more interest. The key, however, is having enough time to take advantage of this concept. The more investment years you have ahead of you, the more your money is likely to grow. By getting started early on retirement fund contributions, you’ll be giving your money plenty of time to multiply over the years. On the other hand, by waiting 10 years to start funding your retirement plan, you’ll be depriving yourself of a decade’s worth of profit courtesy of compounding.
Now you might be asking yourself, “But won’t I miss having all that extra money?” Surprisingly, you might not miss it as much as you think. If your company offers a 401(k) plan, then saving for retirement is especially easy because the money can be automatically deducted from your paycheck during each pay period. Not only does this help by “forcing” you into saving it for later, it creates a situation in which you don’t really come to miss those extra dollars because over time. You probably won’t even remember that they were there in the first place. If you don’t buy into this theory about not missing that extra chunk of cash, then consider upping your 401(k) contribution before your next raise takes effect. That way, you can allocate the additional funds you’ll be receiving each month towards your 401(k) while retaining the same monthly allowance that you’re already used to for expenses, entertainment, and so forth.
If your company doesn’t offer a 401(k) plan, then you can still make yearly contributions towards retirement via an IRA. Saving for an IRA can be a bit more challenging as the money for an IRA can’t usually be deducted from your paycheck. Instead, you’ll have to make a conscious effort to put it aside. One way to help yourself stay committed to funding that IRA is to set up your checking account for an automatic savings plan, where a certain sum of money is routinely transferred into a separate account each month. Of course, an automatic savings plan is not quite as inconspicuous as a 401(k) plan paycheck deduction, but it’s still a great way to ensure that enough money is being set aside to adequately fund your IRA.
By getting started early on your retirement savings, you’ll be putting yourself in a great position to really allow your money to grow. So as tempting as it might be to take those extra dollars and use them for clothing, entertainment, or a nice vacation, remember that in the long run, you’ll be far better served having those funds on hand for when you’re no longer working.
