This post is by our regular contributor, Erin.
What if I told you that you can’t afford to not start saving for retirement, especially when you’re in your 20s or early 30s?
Have you ever stopped to think about how much money you might need in retirement? Or how costly health care may be by the time you finally retire?
Who’s to say we’ll have any sort of government help? Social Security, Medicare, pensions, etc. might not be around to assist us. Even if they are, the future is so uncertain, it can be a mistake to rely on them.
If you’re one of the many millennials who can’t be bothered to save for retirement now, then you need to take a look at these three reasons why you shouldn’t delay.
1) The Effects of Compound Interest Diminish Over Time
The reality is compound interest is at its strongest when we’re younger. We have years and years ahead of us before we retire, which is why we delay saving, but it’s also what makes compound interest work so well.
If you’ve ever heard of the snowball method of paying off debt, compound interest is similar in the sense of saving money. The basic concept is that the interest your money earns also earns interest.
This article by Business Insider contains three charts illustrating the power of compound interest that will probably blow your mind if you’re not familiar with it. Suffice to say, time makes a huge difference on your returns.
In the second example in the article, one person begins saving $200 per month at age 25, while the other begins saving at age 35, and both experience a 6% rate of return. The one who began at 35 ends up with around $200,000, and the one who began at 25 ends up with around $400,000. Crazy, isn’t it? That’s why you need to save for retirement now – not tomorrow.
2) We’re Likely on Our Own to Save
I don’t think it’s news to most people, but trends point to Gen Y being on their own for retirement savings. We aren’t as “lucky” as our parents might be with pensions and Social Security. Pensions are slowly being phased out, and even government pensions are decreasing benefits.
Instead, employers are offering defined contribution plans (like a 401(k)), which shifts the burden of saving for retirement to us. Our retirement isn’t likely to be funded by anyone else. (Do I need to mention that you shouldn’t rely on an inheritance, either?)
Isn’t that a little scary? Let’s go back to one of the opening questions – how much money will you need to save for retirement? This is going to be different for everyone based on a number of factors, but think about having to save $500,000 or even $1 million for just a second.
These are realistic amounts, especially when you consider how much longer we’re living into retirement, and how much health care is going to cost us. If that doesn’t make you realize you need to start saving now, I don’t know what will!
3) Getting Into the Habit Now is Necessary
It’s not always about the numbers, though. Sometimes, it’s simply about establishing the habit of saving. If you graduated from college with a crazy amount of student loan debt, you’re familiar with feeling overwhelmed about it all. How can I start saving when I have so much debt to pay off? How can I start moving forward with any of my financial goals?
Well, it doesn’t get any easier. If you plan on buying a home, having a family, getting married, traveling, buying rental property, and the list goes on, things are always going to get in the way. Unless you make saving for retirement a priority, it won’t happen.
That’s why it’s so critical to get into the habit of saving for retirement early. When you do, you learn to adapt to having a little less money. Over time, you barely notice it. When you start earning more, or have less debt to deal with, you can increase your contributions painlessly.
If you keep putting it off because of X, you’re going to keep putting it off because of Y, and then Z, and by that time, you’ll be 55 and wondering where the heck all those years went. Don’t do that.
How to Start Saving for Retirement
This has been a struggle for me as I’ve been balancing saving for an emergency on top of paying off student loan debt. I was never offered a 401(k) through an employer, and until I started blogging, I didn’t realize I could open an IRA myself. As a result, my retirement savings have suffered. I’m hoping this will keep some of you from making the same mistake I did.
Contribute More to Your 401(k) if You Can
Do you have a 401(k) available at work? Then start there. Your employer may have enrolled you with a 3% contribution. However, you can choose to go higher if you have the money to spare, and you should if your employer offers a company match.
To receive matching contributions from your employer, you have to contribute a certain amount (typically between 3-6%) of your salary. But you’re getting free money. If you’re not contributing enough, you could be missing out on thousands of dollars per year from your employer!
Check with HR or the individual that manages your plan and ask them how much you need to contribute to get the match. You can also request that they raise your contributions if you want to save more.
Look for Accounts With No or Low Minimums to Start Saving Today
Don’t have a 401(k) or want to save even more? Open an IRA. You can open a brokerage account with a low minimum if you don’t have a large amount to invest right away. Check out Scottrade, Trade King, and Betterment as solutions that have no or low minimums to open an IRA.
What Account to Open?
If you’re contributing to a 401(k) at your job, you can still open an IRA. There are differences between a Roth and Traditional IRA that you should be aware of before choosing which one to open. Educate yourself beforehand!
Self-employed? You’ve got a number of different options to choose from as well, and you should make every effort to set up an account and begin saving because you’re definitely on your own as far as saving for retirement goes.
Start Somewhere – Set up a Monthly Automatic Withdrawal
I set up a monthly automatic withdrawal from my bank account to my Roth IRA for $50 per month. No, that’s not going to max out my IRA (you’d need $458 per month to do that), but it’s something.
I’m sure I’m not alone in saying that sometimes, you feel like whatever you’re doing financially isn’t enough. Well, enough might never be enough. Does that mean you’re going to give up completely? No, of course not. So start contributing whatever you can, because that’s way better than $0.
Make it Easier to Save
Don’t have any room in your budget whatsoever for retirement savings? If you’ve got tons of high interest student loan debt, consider consolidating or refinancing to lessen the burden.
Do you have a budget? Track your expenses to see where your money is going so you can determine whether or not you can spare $20 per week for retirement.
A mix of cutting back and earning more may allow you to optimize your finances so you can save more.
__________________
The simple fact is most young adults aren’t prioritizing saving for retirement. Don’t make that mistake. You have three very good reasons to begin saving now, along with actions to take that will get you there.
Do you think young adults need to save for retirement today? Did you delay saving for retirement and wish you had started earlier? Do you have access to a 401(k) or company match, or did you open an IRA?
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I think part of the problem is retirement seems so far off for young adults so they continue to put it off or think make up for it later. So important to save early and often. If your employer offers it at least take advantage of the company match as a starting point, free money is free money.
So true…you can’t afford NOT to start saving for retirement. I have co-workers who used that excuse when I first started working. They kept putting it off saying that they’ll start saving when they get a raise or pay off such and such but truth is…there’s always going to be some excuse not to start. Compounding works magic if you start early and starting early builds the habit of saving.
Good post Erin, I’ve got a similar one running next month. Looking back I wish I would’ve started much earlier than I did. I thought retirement was so far off, I was paying off debt and I thought whatever little amount I put away each month would do nothing – I wish I could go back and smack myself. :)
DebtDiscipline Exactly – I can’t tell you how much I wish one of my employers offered a 401(k). I’d be so much farther along with savings. It’s foolish not to take advantage.
Andrew LivingRichCheaply Yes, life will always find a way to prevent you from saving; excuses are too easy to make. You just need to start, even if it’s with something small.
FrugalRules Haha, it’s so easy to get caught in that trap, especially if you’re a “go big or go home” type of goal-setter. I know I’ve run into that roadblock often, thinking what I’m able to save isn’t enough. But it’s seriously better than $0.
The funny thing about compounding growth is that it continues to compound. Plus, starting early makes it so much easier to ease up on retirment contributions if you need to take a career break to help aging parents or if you need to help your kids pay for college or if you have some other intermediate financial goals.
Hannah UnplannedFinance Yep. I understand it’s hard to get started when you’re paying off student loans or trying to save for something big, but the reality is it will only get harder!
I think you’re spot on with this article Erin. We cannot rely on some of the things our parents might have relied upon in retirement such as Social security, Medicare or pensions. There is so much uncertainty that it seems that the only thing you can do is protect yourself by planning for retirement as if none of that will be there.
I’m trying to do as much as possible but I feel like I got a late start so my options aren’t as appealing. But it’s like you said, we all have to start somewhere. For me personally, it was recognizing that I needed to both save more and earn more – as well as consolidate student loans.
By the way, I was wondering who is the brains behind the operation, you or David :)
Terrific post!!
Laura Beth @ How To Get Rich Slowly Thank you! I think a combination of saving more and earning more is a good way to go. It’s hard to make room in our budget for something that’s so far away, but it’s completely necessary, otherwise we risk the safety of our future. That said, it is tough to start out later, but there are plenty of ways to make adjustments (if needed) to secure your retirement.
Young Adult Money is all David! He just hires me to write. ;)
I’ve had seniors tell me that they feel sorry for me and my generation but seniors (most of them are baby boomers) went through complex times too like WWII, Vietnam War, Korean War, etc. Anyway, I don’t feel sorry for myself because that doesn’t really accomplish anything. What am I going to do feel sad for the rest of my life? Nope. Our best security is ourselves. That means being educated, learning, putting into action what we’ve learned, etc.
Most people go out to eat each month and spend anywhere to $50-100 or even more, if we can afford to eat out at least once a month which many of us can, then we can afford to actually save for retirement.
EverydayMoxie I like that attitude, and really, every generation has its ups and downs. From an older perspective, it might seem like we have it harder, and maybe we do (as far as saving goes), but it’s in our control! Like you said, it’s just a matter of prioritizing it.
Things were pretty tight when we were paying down debt. So I had $25 a week transferred out of the main account and into the secondary one. Then I had $100 deducted a month. It was better than nothing, I figured.
AbigailP Exactly, it’s definitely much better than nothing. I wish I had adopted that mindset sooner.