As a younger person in your 20s or 30s, retirement may be the last thing on your mind right now. You likely won’t even retire for another 30 or 40 years — so why is it important to start thinking about it this early on in your life?
As you get older, you’ll find that saving early for retirement is one of the best decisions you can make. In this article, we’ll explain why saving for retirement is so important, as well as the benefits those savings can offer. We’ll also cover some tips on early saving for those in their 20s as well as those in their 30s.
The Importance of Saving Early for Retirement
The biggest reason to consider saving early is to enjoy a more comfortable retirement, as greater savings will allow you more financial independence.
With more of the baby-boom generation retiring every day, the current Social Security surplus is only due to last until 2034. If you plan to retire in your 60s with Social Security as your sole source of income, you’ll have to adjust your standard of living dramatically. Those adjustments may include downsizing your home, reducing your travel and having a lower disposable income.
Saving for retirement early will let you experience more financial stability and freedom during your retirement. Rather than relying solely on social security, you can comfortably afford to purchase the home or car you desire, travel and enjoy life more overall.
The Benefits of Saving for Retirement Early
Saving for retirement comes with several potential perks you can enjoy for many years to come. Here are five benefits of saving early for retirement.
1. Lower Taxes
With a tax-deferred savings plan such as a 401K or individual retirement account (IRA), you can postpone paying taxes on the invested money until you withdraw the money after retirement. Brush up on the IRS withdrawal guidelines and your state’s income tax policies — this way, you’ll know whether you are required to pay state income taxes on 401K money.
2. Compound Interest
Saving early for retirement lets you take advantage of compound interest. While financial institutions calculate simple interest based only on the money you deposit, compound interest lets you earn on both your deposits and the interest they’ve already earned. In short, compound interest grows your money faster as the interest builds upon itself.
When you invest in a retirement plan, you have the opportunity to benefit from tax-deferral to grow your retirement account faster. The earlier you start saving for retirement, the more your investments will be able to have the potential to grow.
3. Family Benefits
When you accumulate enough funds over time to retire comfortably, you can offer financial support for your partner, children or any other members of your family should they need it. There may come a time when you want to financially help someone, and if you don’t have your own savings built up, it is hard to be able to help others. Also, when your children reach a reasonable age to start saving for retirement, you’ll have the knowledge and experience to teach them how to make the most of their investments.
4. Supplementing Social Security
One of the most significant benefits of saving early for retirement is that it will help you maintain a standard of living it may be challenging to match with Social Security alone. People born after 1960 will start receiving Social Security benefits at 67. Saving early can give you the financial security to retire earlier while maintaining a comfortable lifestyle.
5. Valuable Life Practice
In your early 20s, you may have recently graduated from college and just started a new job. In your mid-20s you may be gradually advancing in your established career. Whatever your working situation may be, it’s always a good idea to start saving as early as possible.
When you’re ready to retire, you can estimate you are going to need between 70%-90% of your pre-retirement income to maintain your standard of living. Before that, you’ll need somewhere easily accessible to put the money you’re saving — this can be in the form of investments in a non-qualified (or not a retirement) account, or in a savings account depending on your risk tolerance.
In your 20s, your working income is likely enough to cover your living expenses with a small amount left over. If you’re just starting your career, you may still be working toward the level of earning significant raises and promotions. In this situation, it’s a good idea to start small when saving for retirement.
You can start by setting aside just 1% of your monthly income and growing your retirement fund by an additional percentage point each year. This method allows you to increase the amount you set aside for retirement as your income grows over time.
Saving for Retirement in Your 20s vs. 30s
Now that you’ve learned about some of the benefits and importance of saving early for retirement, how can you start doing so?
Your best methods of saving for retirement can vary depending on your age. Let’s take a look a how someone in their 20s might start saving versus strategies someone in their 30s might use.
Saving in Your 20s
In your early 20s, you may have recently graduated from college and just started a new job. In your mid-20s you may be gradually advancing in your established career. Whatever your working situation may be, it’s always a good idea to start saving as early as possible.
When you’re ready to retire, you’re going to need about 70%-90% of your pre-retirement income to maintain your standard of living. Before that, you’ll need somewhere easily accessible to put the money you’re saving — a savings account is probably your best option. It’s best to make a separate account for your retirement savings to keep that money clearly marked for its intended purpose.
In your 20s, your working income is likely enough to cover your living expenses with a small amount left over. If you’re just starting your career, you may still be working toward the level of earning significant raises and promotions. In this situation, it’s a good idea to start small when saving for retirement.
You can start by setting aside just 1% of your monthly income and growing your retirement fund by an additional percentage point each year. This method allows you to increase the amount you set aside for retirement as your income grows over time.
Saving in Your 30s
Responsibilities typically start to pick up once you reach your 30s. You may have a mortgage, spouse or children by this time, so you’ll need to set aside even more for living expenses. Even so, saving for retirement should still be a priority.
If you started saving for retirement in your 20s, you can continue raising your retirement savings by 1% each year. However, if you’re just starting to save for retirement in your 30s, use the 15% rule and set aside about 15% of your gross annual income each year.
Contact Nova Wealth Management for Help With Retirement Planning
Saving for retirement early vs. later lets you discover the true value and array of benefits savings can bring. You can rest easy knowing that you’re taking charge of planning for your future and ensuring you’ll be more comfortable in your later years.
If you want to start saving early for retirement and need some guidance through this process, Nova Wealth Management is here to help. We’re happy to offer you our services evaluating your current living and working status and determining the right steps for building your retirement plan. Let us help you plan for a brighter future — schedule your free consultation with us today!
