You’ve joined the adult workforce and you’re trying hard to manage your money responsibly. It doesn’t take you long to realize why people dream of the day they can retire and quit working.
Do you wonder how people are able to retire at age 55 or 60 or even 65? Do you wonder how much money you would need to save to be able to retire at a young age?
Wondering when to start saving for retirement is a common question amongst those who are good at looking ahead to the future. It’s also one that can get overlooked when life starts to happen and your money gets eaten up by other needs like buying a house, taking care of kids, paying for health insurance. Then you have to worry about how to pay for college for those same kids.
Wondering when is the right time to start saving for retirement? Read on for a guide to retirement savings.
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When Should I Start Saving for Retirement?
When to start saving for retirement is a pretty simple question to answer. The sooner you start saving the better. Even waiting five years can make a profound difference in the amount of money you have when you hit retirement age. Start at the youngest age you’re able.
Once you start working full time, you should establish a budget for yourself. If you do this early on in your life before you have a laundry list of bills and responsibilities, you will get used to living by the confines of a budget.
Make sure to think about your expenses and goals while working out your budget. You want to set up a percentage of your income to go to savings. Then you can calculate how much to move into retirement savings.
If you have debt, work to pay it off. There’s no reason to pay interest on debt you can get rid of. That’s money you could put towards retirement savings.
How to Save
Once you get past that first hurdle of managing your personal finances, now you can plan for saving. You need to have an emergency fund. This can cover your expenses in the event of an emergency like a health crisis or being out of work. It’s where you can get money when your car breaks down or your furnace needs repairs.
Once you have a funded emergency fund, you want to go back to your goals. Are you saving for a big-ticket item like a new car or a house? Set aside money for that.
You want your retirement savings to be its own column of savings. Otherwise, you might find ways to never get to it. Consider if your workplace has you pay into a pension plan or if the workplace has a 401k plan. More on plans later.
You always want to take advantage of these plans. The money comes out before taxes and often your employer will match funds. This is free money towards your retirement you must be taking advantage of.
Investing Your Money
If you have a saving account (and you should), you put your money into the account at the bank. The money might earn a small amount of interest, not an amount you’re likely to even take note of.
Investing, however, is taking your money and putting it into something so it grows. This is how you really make the money you are setting aside for retirement and turn it into a significant amount of money by retirement.
You will need a good financial advisor and to get some knowledge. There are many places you can invest your money. Some will allow your money to grow more quickly but maybe they offer more risk too. You might put your money somewhere safer, but it will have less growth.
Deciding the right place to invest is tricky and where you often need the advice of a professional. Much of this will depend on your age and on how long you have until you actually hope to retire.
Building Your Wealth for Retirement
The younger the age you start to save for retirement the better for several reasons. The most obvious is that you can save more. You have longer to put the money away.
You also have longer to grow the money you are saving. You might want some of your money buying stocks while other parts of your money in other places.
A financial advisor who understands your long term goals will also help to decide the best ways to diversify your money. This is where you might choose to have some of your investments for retirement in higher-risk opportunities where you might grow it more. You might also put some in lower-risk funds so it is safe too.
Understanding Compounding Interest
When you consider growing your wealth, you need to understand the concept of compounding interest. In the simplest terms, compounding interest means that your money grows over time not just from the money you save and invest but also from the interest you get from it.
Your $100 a month might not seem like much at first. But over 30 or 40 years of saving, that money gets paid interest on it each year. Then you have more money because you add to it and you have the interest you have made. Then all that continues to make more interest.
Your money grows exponentially over time from your initial investment and the interest and growth you get from it.
If your employer offers some type of savings or retirement plan option, this is the easiest way to get started saving your money. Often if a retirement plan like a 401k is available, the employer also pays into it.
This means not only are you investing and making money on your own money but also from money from the employer too.
Common plans include:
- Employer-sponsored savings plans
- Private savings plans
- Money market securities
- Mutual funds
- Pension funds
Take advantage of the plans available to you. Also, talk with a financial advisor about how to diversify your money.
Knowing When to Start Saving for Retirement
When to start saving for retirement is simple, as soon as possible. The early you start to save the more money you will have and the better prepared you will be for a nice retirement.
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