Retirement might not be at the top of your list in your 20s and 30s for several reasons, but did you know that right now is the best time to start saving for retirement? Among other reasons, which I’ll get to, don’t worry! Starting now rather than waiting a year or two to take advantage of compound interest can benefit you tremendously.
Let’s explore how you can start saving for your retirement now.
Saving for Retirement? Check Out These Scenarios
How about we start with compound interest. What is it anyway? Let’s imagine you have $1,000 to invest. You put that $1,000 into an investment account. In one year, you have the $1,000 you set aside, BUT you also earned interest!
Let’s say that you earned 10% that year. So, now you have the $1,000 you contributed AND the $100 in interest you earned, which equals $1,100.
Now, assume you never contribute anything else, but continue to earn 10% each year:
End of Year 1: $1100
Year 2: $1100+$110 (interest) = $1,210
Year 3: $1210+$121 (interest) = $1,331
Year 4: $1331+$133.10 (interest) = $1,464.10
Year 5: $1464.10+$146.41 (interest) = $1,610.51
Year 6: $1610.51+$161.05 (interest) = $1,771.56
Year 7: $1771.56+$177.16 (interest) = $1,948.72
Disclosure: The hypothetical investment results are for illustrative purposes only and should not be deemed a representation of past or future results. Actual investment results may be more or less than those shown. This does not represent any specific product and/or service.
By year 8, without you having to add any additional money, your initial investment has doubled!
Now, imagine if you set aside $100/month for 45 years. In the last 45 years, the S&P 500 averaged 8.48%.
In 45 years, with $100/month, you would have saved $54,000 yourself into your investment account.
With this scenario, at the end of 45 years, your total value would have been $632,870!
Here’s why it’s so important to start early. If you started saving $100/month and only had 35 years to take advantage of compound interest, you would have set aside $42,000. The average for the S&P 500 in that timeframe was 8.66% but even with a slightly higher average interest rate, your estimated total value would only be $275,195.
That’s a HUGE difference, primarily due to missing out on 10 years of compounding!
In addition to taking advantage of compound interest, here are a few more reasons why it should be at the top of your list to start saving for retirement now:
Social Security Changes
There’s a lot of debate as to what social security will look like in the next 30-40 years. Many are worried that they will see reduced benefits, while others think social security won’t be there at all. You may or may not know this, but for those of you in your 20s and 30s, the new social security retirement age (the age when you can receive your full, unreduced social security benefit) has increased from 65 to 67.
Many of you may not want to work until 67, and because no one knows with 100% certainty what the future will hold with social security benefits, you need a plan. This may mean a more aggressive savings approach, a more aggressive investment selection, a more complex or diverse portfolio, or some combination of these and other strategies.
Regardless of what the future holds for social security, you still have control over your goals and dreams for your retirement as well as how early/often and how much you choose to set aside to meet your retirement goals.
As you probably know, those of you in your 20s and 30s are expected to live longer. Advances in medicine and healthcare are great, but that means your retirement dollars need to last a little longer. Gone are the days of retiring at 65 and enjoying 10 years or so in retirement. Many millennials have plans to retire early, and life expectancy is well into the 80s. This means you could be living off your savings for 30+ years!
Fewer Retirement Plan Options
So much has changed over the last 50 years. Your grandparents (and possibly parents) may have worked for one employer for 30-40 years and received a pension that paid for a good portion of their retirement needs. These days it is rare that someone would work for the same employer for their entire career, let alone find a private-sector job with a pension plan. While pensions do still exist, they are found more often working in the public sector (teachers, police officers, firefighters, etc).
The responsibility of retirement savings has shifted from the employer to the employee. 401k plans are much more common, and even employer matching in those 401k plans has decreased over the past 10-15 years. This puts even more responsibility on your plate to save for your retirement. There are also more entrepreneurs and self-employed individuals who don’t have an employer plan in the first place, which means opening up IRAs or other self-employed retirement plan options.
No longer having an employer contribute to the majority of your millennial retirement plan means more savings coming out of your paycheck to reach your retirement goals.
There are also a few obstacles that previous generations didn’t have:
Student loan debt is no joke. You might graduate from college with tens or hundreds of thousands in student loan debt. Not only is that huge number daunting, but you have to decide how to divvy up your hard-earned money between your current debt (which may also include a car payment, mortgage, and credit cards) and your future retirement.
While there are different schools of thought on this, I recommend meeting with a financial professional, like myself, to sort out the best option tailored specifically to you.
You need one! Most individuals in their 20s and 30s have only $1,000 or less in an emergency fund. There are so many debts and future obligations, but you can’t forget about current needs. A minimum, basic emergency fund goal should be three months of expenses. Your ultimate goal will vary depending on job stability, employment status (self-employed, full time, part-time, etc.), health, family obligations, and so on.
Here comes the tough love:
Take advantage of your employer match, and Roth IRAs, build up an emergency fund to a minimum of 3 months of expenses, attack debt, save for the future. Easy right? While it does mean living well below your means and using 20-40% of your paycheck for financial goals. It will set you up to be debt-free, have an emergency fund for when you need it, and help you retire comfortably.
As always, if you have questions regarding financial planning for millennials for your unique situation, don’t hesitate to contact me about saving for retirement. Also, click here so you don’t miss a blog post!
Nichole M. Coyle
CERTIFIED FINANCIAL PLANNER™
20333 Emerald Pkwy
Cleveland, OH 44135
Securities and advisory services offered through Cetera Advisor Networks LLC, member FINRA/SIPC, a Broker-Dealer, and a Registered Investment Advisor.
Cetera is not affiliated with the financial institution where investment services are offered or any other named entity.
Investments are: Not FDIC/NCUSIF insured * May lose value * Not financial institution guaranteed * Not a deposit * Not insured by a federal government agency.
All investing involves risk, including the possible loss of principal. There is no assurance that any investment strategy will be successful. Some IRAs have contribution limitations and tax consequences for early withdrawals. For complete details, consult your tax advisor or attorney. Distributions from traditional IRAs and employer-sponsored retirement plans are taxed as ordinary income and, if taken prior to reaching 59 ½, may be subject to an additional 10% IRS tax penalty. Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing. A diversified portfolio does not assure a profit or protect against loss in a declining market.