Why It Is Never Too Early to Start Retirement Planning
The average retirement age in America is 63. This may seem like many years in the future if you are in your 20s. However, it may still be advised to start planning your retirement as soon as you can. Retirement planning is a long process. It can take several years to understand your future needs and accumulate enough savings to prepare for a financially secure retirement. In addition to this, factors like inflation, taxes, evolving needs, financial responsibilities, etc., can come in the way of your plans and present challenges every now and then. Therefore, it can never hurt to go overboard and be a bit cautious. One way to do this is by starting retirement planning early.
For people in their 20s, it can be a bit hard to concentrate on their future financial situation. Most individuals at this age may be grappling with student loans, job insecurity, low paychecks, etc. If you have just finished college, you may not get a job instantly and may remain without an income for some time. Even if you get a job, you may struggle to get a high income straight away. However, you would still have expenses, such as rent, groceries, electricity, etc., to take care of. Retirement may be a far-fetched thought at this juncture in life. However, starting early can offer you an edge later. If you need guidance on how to start saving for retirement, which instruments to invest in, how to set up a budget, manage your expenses, and more, consult with a professional financial advisor who can advise you on the same.
If you are wondering why should you start saving for retirement early, here are some reasons:
1. You can earn more over time:
If you start saving in your 20s and plan to retire at the age of 65, you have approximately 40 years to prepare for your golden years of retirement. On the contrary, if you start at the age of 35 and plan to retire at the age of 65, you would have ten years less. This may not seem as much, but the difference in your final earnings can be significant. Starting saving and investing from a young age also lets your money earn interest through compounding. The power of compounding invests your profits earned back into the market to earn a higher reward. So, the sooner you start investing and the longer you invest your money, the more money you make in the end.
Another benefit of starting early can be the additional contributions from your employer. If your workplace offers a 401k retirement account, and your employer offers a contribution, you get to contribute doubly to your 401k. A 401k can be fueled with employee and employer contributions. So, for every dollar you put in your account, the employer may match your contribution. This is free money that you can get on top of your salary and other benefits at work. Over time, these can add up to a lot and help you secure your retirement. As of 2022, for someone below the age of 50, the total contribution for employee and employer contributions has been mapped at $61,000 or up to 100% of your compensation per annum, whichever is higher. Given these high values, contributing to your 401k can be highly advised even if you have other financial liabilities.
2. You have fewer responsibilities in life:
Your financial responsibilities are the lowest when you are young. Most people get married in their 30s or later. They also choose to have kids after they get married. So, your 20s are, in most cases, reserved for yourself. When you are single, you have fewer financial liabilities. Your needs may be limited as well. You may not need a big apartment in your 20s and can save on rent. Likewise, you may not be financially responsible for your spouse or children, so you can save up money on groceries, fuel, insurance premiums, education expenses, etc. With no immediate dependents, you can have a lot of disposable money and invest it for your future use.
A lot of people spend their younger years spending money on unimportant things. Your youth will never be back, so enjoying it to the maximum is highly encouraged. Having said that, it is also essential to not get swayed by the present and undermine the future. You can indulge in your favorite food, travel, clothes, etc., every once in a while. But you can also eliminate unnecessary expenditure on the other side. For instance, you can cancel the OTT subscriptions you do not need or opt for a relatively more affordable gym class to save money. Peer pressure can be substantial at this age and you may want to spend on luxury brands. However, it is important to be realistic and keep critical financial goals in sight. Retirement planning starts with small steps that can go a long way. So, you do not necessarily have to make grand gestures like living frugally and saving all your money for the future. Instead, you can make small changes like not spending above your means, making minor cuts here and there and saving more, being mindful of your expenditure and adopting better financial habits, etc.
3. You have a higher risk appetite:
There are different types of investment options in the market. Some contain high risk and offer higher rewards, while others have low risk and deliver relatively lower returns. Depending on your goals and risk appetite, you can invest in any of these options. Typically, your risk appetite is the highest when you are young and gradually lowers as you age. So, if you start retirement planning at a young age when your risk appetite is the highest, you would be able to allocate more money to high-risk, high-return investments. This will help you accumulate a lot of money early in life. On the contrary, if you start saving at a later stage in life, you may not be able to take as much risk. This can impact your returns and you may end up with a smaller retirement corpus.
4. You can concentrate on multiple goals easily:
When you start retirement planning early in life, you can get a lot done early in life. This leaves a lot of room for other financial goals. For instance, if you start saving for retirement in your 20s, you will have saved up a considerable amount by your 30s by the time you decide to have kids. So, you would be able to concentrate on their needs with much more focus and attention. Additionally, you would not be so overwhelmed or stressed about planning for multiple goals and can instead concentrate on the pressing issues ahead of you.
People who start retirement planning and other financial planning at a later stage in life often struggle with multiple financial responsibilities together. If you start saving for retirement in your 30s when you get married and are planning to have children, you can be much more stressed. You would have to cover your child’s basic expenses like clothing, food, education, and healthcare. Moreover, you would also have to save for their higher education expenses. Further, you may be planning to buy a home and can have a mortgage. If you add retirement planning on top of all this, you are more likely to compromise your present financial needs. You may also commit errors in order to accommodate all your needs at once or fall victim to financial frauds that claim to offer high returns in a short span of time and prey on vulnerable investors.
5. You can relax later on in life with sufficient savings:
By choosing to start retirement planning early, you can get a lot done in the initial years of your career and relax when you are older. If you start saving when you are young, even small contributions can add up to a lot. You do not necessarily have to start big. Instead, you can create a budget for yourself and aim to save at least 20% to 30% of your salary for your retirement expenses. It is essential to focus on the percentage and not the figure. So, when you grow in your career and your income increases, your savings rate will automatically rise with it. This instills financial discipline as well as ensures consistency in the long run.
However, if you wait until your 40s to start retirement planning, you will have to increase your savings by a considerable margin to meet the shortage. This can be hard as you may have to bring an abrupt change to your lifestyle. The transition can be challenging if you are not used to saving your money. The older you get, the more rigid you tend to be about your routine, likes, and dislikes. Introducing a higher savings rate at a later stage in life and living frugally than before can be tricky.
Moreover, with fewer years ahead of you, you have a lot at stake. So, you have no room for error. You have little to no scope for negligence and must be very careful and diligent with your investments. If you are not able to save as much as you need for retirement, you may also be forced to postpone your retirement. This can be a cause of stress and worry and even lead to health issues.
When to start planning for retirement
While there is no fixed time to start planning for retirement, it can benefit you more if you start early. As discussed above, starting early can have a number of benefits. You can be much more relaxed. You can also take it slow as you do not have an impending expenditure and are instead saving for a future need. So, try to start retirement from the time you start earning.
However, here are some points to keep in mind during retirement planning:
1. Start with your 401k retirement account:
Your company-sponsored 401k is probably going to be your first investment. Most employers offer it and are willing to match your contribution, so make the most of it. The maximum contribution limit for employees as of 2022 is capped at $20,500 per annum. Try to maximize your contributions. If not, contribute as much as you can.
2. Get rid of debt:
Debt can slow down your progress and render your savings useless, so make sure that you get rid of debt as soon as possible. Most young professionals have student loans. If you have any pending education loans, try to clear them first. This way, you can focus on your future without being burdened by high-interest payments. It is also essential to avoid debt in general. So, limit your use of credit cards, other loans, etc.
3. Hire a financial advisor:
Hiring a financial advisor can help you streamline your goals and devise a suitable financial strategy. If you are unsure where and how to begin, you can consider getting help from a professional. Financial advisors can be hired on fee-only or commission-based models. You can select any option based on your budget and preference.
4. Curb your spending:
New financial independence, youth, and innumerable possibilities ahead of you can be misleading at times. While you may be tempted to spend, try to control the urge and keep your spending in check. Avoidable expenses, impulse purchases, etc., can easily be eliminated if you create a budget. So, try to create a budget and follow it to ensure that you spend your money wisely.
There are many ways to answer the question, “why should you start saving for retirement early”. However, the most straightforward answer can be ensuring that you have a considerable retirement corpus when needed. Time can offer multiple benefits, so make sure that you use it to your advantage. You can start small and gradually increase your savings rate as you excel professionally.
If you find it hard to get started, you can consider reaching out to a professional financial advisor in your area. Use WiserAdvisor’s free advisor match service to find highly qualified and vetted wealth advisors who can guide you on the same. Answer a few questions about yourself and get matched with 1-3 wealth advisors that are suited to meet your financial requirements.