It may seem strange to start talking about retirement when you’re just beginning a new career, until you consider these statistics:
- 57% of Americans have less than $1,000 in their savings accounts
- Experts say you’ll need to save 10 to 12 times your current income to retire comfortably
- Most people are saving less than half as much as they should be.
Most of us can’t count on receiving an employer-paid pension, so you need to take control of your retirement savings plan. The sooner you begin saving, the faster your nest egg can grow thanks to the power of compounding. Assuming 6% annual returns, $1,000 invested at age 25 will grow to $10,285 by age 65. That same $1,000 invested at age 45 will only grow to $3,207.
The best way to maximize your savings is to “pay yourself first” by automatically depositing part of each paycheck in a retirement savings account. This strategy has two benefits: You won’t be tempted to spend the money because you never actually see it in your paycheck, and you aren’t taxed on retirement contributions, so you’ll owe Uncle Sam a little less next year.
When you’re searching for a job, look for employers that offer a retirement savings plan such as a 401(k), which give you investment options such as mutual funds and often make expert guidance available to help you choose the right investments for your situation.
Even better, find a job where your employer will “match” your 401(k) contribution up to a certain percentage of your salary. That’s free money that can double the amount you’re able to save each year.
If your employer doesn’t offer a 401(k), you can still automate your retirement savings by setting up an Individual Retirement Account (IRA). Depending on your income, you may be able to deduct IRA contributions, or enroll in a Roth IRA which offers tax-free withdrawals when you do eventually retire.
Once you’ve started saving, only withdraw retirement funds or borrow against your retirement account in an emergency. In most cases, you’ll pay a 10% penalty on money withdrawn before age 59½, and you’ll lose the benefit of compounding, which will set you back in saving toward your retirement goal.
“Saving early for retirement is the best way to maintain financial independence and security later in life,” according to the U.S. Department of Labor. For more detailed advice on retirement savings options, download their report, “Saving Early for Retirement.”