Saving Smart. Starting Early.

Saving Smart. Starting Early.

For most young adults between the ages of 20 and 35, saving for retirement is not a priority. In fact, one particular study found that 55 percent of Generation Y individuals (those born between 1980 and 2000) have not even started a retirement saving

Published Monday, January 5, 2015

For most young adults between the ages of 20 and 35, saving for retirement is not a priority. In fact, one particular study found that 55 percent of Generation Y individuals (those born between 1980 and 2000) have not even started a retirement savings plan yet. Even more said they simply haven’t given it any thought. Whether it’s because of low or no income due to a challenging job market, the burden of paying off student loans, or simply a lack of interest in long-term planning, young people are losing precious time when it comes to securing their financial future. Putting off saving for retirement during these early years will prove to be more costly, and possibly more stressful, as time flies by and today’s young generation suddenly finds themselves fast approaching the inevitable golden years.

It may be hard to believe but, the truth is, those years will go by quickly. Past generations will undoubtedly attest to that. But those past generations also had more income options at the time of retirement, such as social security and long-time employer pensions. Future generations, unfortunately, don’t have that kind of guaranteed stability. So, the time to start saving is now and here are just a few good reasons why:

  1. Compounding interest—Albert Einstein called compounding interest the “greatest mathematical discovery of all time” and “the most powerful force in the universe” and we all know he was no dummy. The bottom line is the interest on savings earns interest and that interest continues to earn interest so it makes sense that the younger one is when saving begins, the more time that money has to compound. For example, if Jake starts working when he’s 18 and contributes $100 from each month’s pre-tax paycheck into a 401(k) plan or an individual retirement account (IRA), and invests well to earn an average of 10 percent annually until he’s 68 years old, he’ll have $1,396,690. Keep in mind, that’s if he only contributes $100 a month. If he increases his contributions over the years, his retirement income will be significantly higher. Now, on the other hand, if Sophie decides to start her retirement savings account when she’s 28 years old and contributes the same as Jake, $100 pre-tax dollars a month with an average interest rate of 10 percent, by the time she’s 68, she’ll have $531,111. Not a small amount by any means but still not nearly what Jake saved by starting 10 years earlier.
  2. Aggressive investing—Investing in stocks at a younger age has some real advantages, too. Since there’s more time to weather the ups and downs of the market than someone closer to retirement age, young investors can be more aggressive, choosing higher risk options that typically yield higher returns. As retirement approaches, conservative investing is typically more advantageous.
  3. Tax benefits—Contributing to an employer’s 401(k) program or an IRA offers pre-tax savings. That means the money invested in either of those types of accounts is deducted from income before taxes are. This creates a lower taxable income, which results in paying less in state and federal income taxes. Income taxes, however, must be paid on any withdrawals from these accounts. Penalties also apply if money is withdrawn before a certain age. Roth IRAs are another option and especially good for young people who are typically in a lower income tax bracket. Contributions to a Roth IRA have already been taxed since they come out of an after-tax paycheck. This allows investors to avoid paying higher taxes on that money later when rates may increase or a higher tax bracket is reached. Roth IRA contributions grow tax-free and can usually be withdrawn without penalties as long as a certain age is reached.

There are many ways to save for retirement. The most important thing is to start now, even if it seems like a small amount. Over time, that seemingly minimal savings will turn into a significant retirement income down the road.

For more information on getting started early saving for retirement, check out these sites:

http://moneyfor20s.about.com/

http://www.forbes.com/sites/financialfinesse/2012/07/25/what-young-people-need-to-know-about-retirement/

http://blog.taxact.com/retirement-saving-for-young-people/

https://www.americanprogress.org/issues/economy/news/2014/07/31/94933/why-millennials-arent-saving-for-retirement-and-what-we-can-do-to-change-that/

http://www.nytimes.com/2014/04/13/opinion/sunday/saving-young-people-from-themselves.html?_r=1

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