Enjoying a comfortable retirement is a goal shared by people from all different walks of life. But whether you’ve just entered the work force or you’re nearing social security age, there’s a good chance you aren’t saving enough to make that dream a reality.
For most people, social security will not provide enough to live comfortably and only about a quarter of American workers will have a pension. Here’s why it’s wise to start saving for your future today.
Maintaining a Standard of Living
Before you start saving, you’ll want to determine just how much money you’ll need in retirement. This means answering a few questions about yourself:
- When do you plan to retire?
- How much more money do you need per year than social security can provide?
- Do you plan to maintain a lifestyle that’s similar to your pre-retirement life?
- Will you be able to handle unexpected expenses?
Once you answer these questions, you will have a better idea of what your savings goal should be. Without undergoing this exercise, your savings may fall short of the post-retirement lifestyle you’re envisioning.
Save on Taxes
Starting a retirement account can save you on taxes in both the short and long term. With a 401(k), whatever percentage of your income you dedicate to the plan is no longer taxable for that year. With a Traditional IRA, your contributions can be claimed as a tax deduction. So, while your take-home pay may be less on a weekly basis, you are actually making more money in the long term.
For example, let’s say you make $52,000 per year, get paid weekly and are taxed at about 20%. If you contribute nothing to a retirement account, you make $1,000 in a normal week and take home $800 after taxes. But if you contribute 10% of your salary, you’d make $900 and take home $720 after taxes. While your take-home is reduced by $80, you’ve put away $100 in savings. Over a long enough time, you could save tens of thousands of dollars on your taxes.
The Compound Effect
There’s perhaps no greater reason to start saving young than the compound effect. Let’s say you invest $5,000 in your first year with a retirement account and it accrues at a rate of 8%. In this case, you would earn $400. The following year, you’re able to reinvest this along with whatever else you’ve contributed. As the investment increases in size, so will the earnings. And greater earnings will mean an even greater investment. This creates a cycle where the investor experiences compound growth, which underscores the importance of investing rather than just letting that money sit in a savings account.
Of course, this necessarily means it’s ideal to start investing as soon as possible. A $1,000 investment at age 25 will almost certainly be more valuable than a $10,000 contribution at age 64. In fact, according to CNN Money, the difference in outcomes between someone who starts saving at 25 and one who waits until 35 is more stark than you may realize.
Take two people who are the same age. One starts saving $3,000 per year at age 25 at a 7% annual return and stops saving altogether at age 35. The other person starts saving the same amount with the same return rate at age 35 and continues to do so until age 65. When both have reached retirement age, the first person will have actually saved more money despite not contributing a cent to the account for the past 30 years.
Of course, it’s best to keep contributing right up until your retirement, but this underscores the importance of starting your retirement savings as young as possible. While young people tend not to command as large of a salary as their older peers, they also may not have as many expenses. Yes, student loans can be onerous if you chose to attend college, but you’re far less likely to have a mortgage or children in your early 20’s. Start saving and get ahead of the game.
Looking to start investing in your retirement but don’t know where to begin? First State Investment Advisors is here for you. Call us at 918-492-1361 to start taking control of your financial future today.
This overview is for informational purposes only and is not a recommendation. It should not be the sole deciding factor in making an investment. Investing is a risk and, as with all risks, a positive return is not guaranteed. Past performance does not indicate future results.