When should I start saving for retirement?
When it comes to financial planning people have a variety of questions. One of the most frequently asked questions is, when should I start saving for retirement? The easy answer to this question is that there is no better time to start than today! With that let’s dig a little deeper and see what starting earlier can do for your savings.
The Tail of 2 Brothers
To show how important it is to start investing early consider this story of two brothers.
Brother A starts investing $3000 a year at the age of 21 until he is 30, when he stops investing all together, for a total of $30,000 of his own money. He invests that money into a mutual fund gaining 8% a year until he retires at 65.
Brother B waits until he is 30 to start investing $3000 a year and continues until he is 65 for a total of $108,000 of his own money over 35 years. Brother B also invested his money gaining 8% a year.
At 65 brother A would retire with $642,000 while brother B would only have $517,000 while investing much more of his own money.
It’s easy to see starting early with retirement savings is vital to having a nice nest egg saved up for retirement.
Cut Costs
The easiest way to start saving more today is to cut your monthly spending. However you can do it, cancel subscriptions or gym memberships you don’t use, skip your morning coffee, car pool to work, or trade the car in on a cheaper one, you need to start saving today.
Everyone wants to make the big salary but the truth is only about 10% of Americans make over 100k a year. It is much easier to reduce your costs than to increase your salary. There are plenty of resources on how to save money, and I will have many posts on this in the future.
What is important to know is that what little you save now will make a big difference in the future. Check out this article on how to create a budget to speed up your savings!
Where to Save
Most people today will have the ability to invest into a 401k or 403b through work. If your job provides a match to your 401k it is important to make full use of that. It is also important to make sure that the fees related to your 401k or 403b are not so great as they “wash out” what you are putting into it. If you are only able to afford a few hundred dollars a month your best bet is to open a low cost Roth IRA through Vanguard or another provider. These are usually low or no cost at all, the company makes money usually through mutual fund fees on the interest you make. You should easily be able to keep these well below 1% and should target the mutual funds with the lowest fees you can find. More on this in future posts. Between these two accounts you should have close to $25,000 in account limits as of 2021. For 95% of us this will be more than enough.
Roth or Traditional
Choosing between a Roth or Traditional style investment strategy will mostly depend on how much you make. If you are currently in a lower income bracket it makes much more sense to pay your taxes now and choose the Roth account. If you are a high earner the difference between roth and traditional becomes more blurred. There are calculators you can use to decide what is best for you, but the problem with these is you have to be able to see into the future for them to be accurate. You will need to know how much you will have when you retire and also know the tax code you will fall into in 20 or 30 years. Sounds almost impossible to me! My honest opinion is that taxes will probably only continue to go up over the next decades. This makes the Roth the more appropriate choice for myself and many other savers. It would be best for you, if you are unsure which is best, to talk to a personal financial advisor. They will be able to review your personal income and retirement plans and choose what is best for you.
How much to Save
Now for the true penny pincher, you are going to want to save every cent you can get your hands on. You want to start early and you want to save as much as possible. For the goal of early retirement, you want to target $100,000 by 30 years old, and $500,000 by 40 years old. Now to reach these goals you either need to be in a high paying career or highly focused. If you are able to max out your 401k each year starting at 25 this is a somewhat easily obtainable goal. I know this may sound almost impossible to some, but know, with hard work and focus you would be amazed at what you can achieve.
For the average saver and everyone else this will be different based on current life events and age. If you have kids in college or maybe the wife is staying home with the preschool children you can’t save as much as you like. You should be targeting about 15% of your pre tax pay and at a minimum around 5%. If you are over 40 and have nothing or very little saved you are going to need to kick it into high gear and probably save more than this if you want to be able to retire and maintain your current lifestyle. On the other hand if you are lucky enough to still be in your 20’s and can do it, you should be attempting to max out your retirement savings each year for as long as you can. Saving more in your 20’s will set you up for a high likelihood of meeting your financial goals in the future. Of course if you can’t do that in your 20’s time is on your side and saving even a little now will go a long way as well.
Finishing Up
The moral of the story is to start saving as soon as you possibly can. By starting to save today, you will greatly increase your chance of meeting or exceeding your retirement goals.
Please post comments and questions down below. Saving for retirement is an important but difficult subject for most people. I will do my best to help answer all your questions!
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