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Why to start saving for retirement in your 20s (or even earlier)

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© Creatas / Thinkstock © Creatas / Thinkstock


By Andrew Housser

As a young adult, saving for retirement often feels like an expense that you cannot afford. With building a career, a busy life with friends and dates, traveling and other activities, it is very tempting to pass on saving. Plus, retirement seems so far away when you are just embarking on your career.

But avoiding retirement savings is a costly mistake. As a simple example, imagine you start saving just $100 a month at age 22, and save that same amount until you retire at age 67. Let us say this investment earns 6 percent return per year. After 45 years, that $100 a month would have grown to more than $277,000. 

If a friend waits 20 years and starts saving at age 42, so that he invests for just 25 years, he would have to save $400 a month to get the same total amount. Yet if you could save $400 a month beginning at age 42 – after saving $100 a month from age 25-42 – you would have nearly $500,000 by retirement age. 

1. Find out what you need. It is important to have a realistic sense of how much savings you will need to retire. You can get a ballpark estimate of how much you should save from several online sources. These numbers can be eye-opening, but they are attainable for most people if they start early.

2. Keep paying off other debt. Many younger people are paying off student loans, a car loan, credit cards or personal loans. Paying off debt is very important to your overall financial strategy. The best approach is to balance debt repayment with retirement savings. And when you get out of debt, work hard to stay out of debt, so you can save and invest more for your future. 

3. Do not skip retirement savings altogether. By the same token, do not concentrate so much on paying off debt that you save nothing for retirement. The sooner you begin saving for retirement, the longer your money has to grow. When debt is repaid, ramp up your retirement savings.

4. Put savings on automatic. Get into the habit of having retirement plan contributions taken out of your paycheck automatically. If you work for a company offering a retirement plan, and especially one that offers matching funds, try hard to invest as much as possible there, even while you pay down debt. If you do not take advantage of a 401(k) with matching contributions, you are, in effect, saying “no thanks” to a significant benefit.

5. Check in regularly on investments. Many workplace plans and mutual funds make investing easy. You plug in your money and it grows, right? Usually, yes, but that does not mean the default choice is always the right one for you. Be a knowledgeable investor. Make sure the balance of high- and low-risk stocks and bonds is appropriate for your stage in life. For most people, this means greater risk (and greater return) when you are young. The balance should shift to safer investments as you get closer to retirement age. Also, be sure you increase your savings as your paycheck grows, so you can keep up with your lifestyle.

6. Know what debts to prioritize. If you owe credit card debt, paying off those accounts should be top priority (although you still should save enough to earn your company’s retirement-account match, if at all possible). But think carefully before applying extra money to your mortgage instead of retirement savings. One reason is that mortgage interest rates today are often lower than retirement savings’ return. Another is that mortgage interest is often tax-deductible, further reducing the effective rate. 

And what if your college years are long behind you? It is true that saving early is the way to get the most out of your investments – but it is never too late to save something. Many older workers have fewer expenses, with home or car paid off, and children grown. In this case, resolve to save as much as possible, and especially get out of debt, before retirement.

Andrew Housser is a co-founder and CEO of Bills.com, a free one-stop online portal where consumers can educate themselves about personal finance issues and compare financial products and services. He also is co-CEO of Freedom Financial Network, LLC providing comprehensive consumer credit advocacy and debt relief services. Housser holds a Master of Business Administration degree from Stanford University and Bachelor of Arts degree from Dartmouth College.
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