By age 32, two out three young professionals haven’t started saving for retirement. The reasons vary from hefty student loan debt to not finding that first good job right out of college, or a less-than-stellar starting salary upon entering the workforce. Further, attitudes toward retirement have changed. Many young workers don’t want to wait decades to enjoy the good life. Others don’t have access to employer-sponsored retirement plans. The list of justifications goes on, but the simple answer is that the earlier you start saving, the more options you will have — financially — down the road.
The longer money works, the better the potential returns thanks to compounding interest. Your money grows while you’re enjoying the good life – hiking, skiing, fishing and even sleeping. If you could save $100 per week starting in your early 20s and on, then you would have a nest egg of over $2 million by the retirement age of 67 (assuming an 8% annualized return).
Next, when you have money withheld from your paycheck and placed directly into a 401k or IRA, those sums don’t get taxed. For instance, if you’re in a 20% tax bracket and contribute $1,000 to a retirement account, you will have saved $200 in taxes. The tax savings means you have more principal to invest, which means your money will grow faster. Granted, taxes will be paid when you pull out the funds in retirement, but typically retirees fall into a lower tax bracket. Or, it might be worth considering a Roth IRA where taxes are paid up front and money grows tax-free.
Bottom line: Saving versus spending your entire paycheck is a good practice. Even if the amount is small, make it a monthly habit. Start the new year with an individual retirement account. If you already have an IRA, consider increasing the contribution. Over time, expand your saving for other life goals, such as buying your own house, starting a business or going on a trip. It takes discipline and will create financial independence.
Happy New Year,
Matt Michalski, Vice President
Alpine Bank Wealth Management
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