The following post is by Staff Writer Miss T, from Prairie EcoThrifter. This is her first post, so please join me in welcoming her to the site!
ARE YOUNG PEOPLE THINKING ABOUT RETIREMENT?
Are you in your early twenties and just starting out in your first full-time job? I’ll bet the last thing on your mind is your retirement!
You’re young, maybe just finished college and finally earning your own money. You may have student loans to repay; maybe setting up your first home; you’re probably going out and having fun. Starting a retirement fund hasn’t even entered your head!
This is a common situation for young people just starting out. Even if someone suggested you start saving for retirement, it probably is very low on your list of priorities. There are many other calls on a young person’s money than retirement saving!
Now, you’ll have read that it is never too late to start saving for retirement. That’s true, but it is so much better if you start early rather than late. Having to play catch up is more difficult and stressful, requires greater commitment and discipline and you’ll probably end up with less money to retire on.
How’s all that for a big jolt of motivation!
Still not convinced? How about some numbers to show you what I mean.
THE EARLIER YOU START, THE BETTER
Let’s say you decide to start saving for retirement at age 25 with a plan to retire at age 60. Let’s also say you decide to put away $100 a month into a 401k or RRSP account. If you made no changes to the amount you saved, your account would hold nearly $380,000 when you wanted to retire.
However, if you didn’t decide to start saving for retirement until you were 35, you would only have a bit more than $130,000 by the time you were 60.
What do these figures tell you?
It’s definitely better to start saving for retirement as early as possible. Compound interest is the magic that multiplies your savings and the magic is stronger the more time it has to work!
WHICH RETIREMENT PLAN SHOULD I CHOOSE?
So, what are the best accounts for a young person to use for retirement savings?
When you start work, you’ll find that your company will probably offer a 401k or pension plan of some description. These classic retirement plans have a few distinct advantages – your employer takes the money out of your pay before you get it and so you don’t have to do anything and you never miss it. Simple!
Also, some companies will match your contributions up to a set amount. I bet there are not too many opportunities for you to get free money from your boss! There may be some rules and conditions that apply to this, so make sure you find out what they are. There may be a qualifying period or you may have to stay with the company for a certain time to be eligible.
If your company doesn’t offer a 401K (in the USA) or a pension plan (in Canada), and many smaller companies don’t, they may be able to help you set up a different account for you. You can arrange for the money to be taken directly from your pay just like a 401k or pension plan so you’re not tempted to spend it!
In our example above, we used the same savings amount for the whole of our fictitious person’s working life. In reality, you would increase the amount you saved as your income increased. Most financial advisors recommend working on a percentage of earnings to calculate this, with 10% being the minimum recommendation. Of course, if you leave it till later to start your retirement saving, this percentage of your income you’ll have to save will be more like 25-30%.
So, for a young person, the best retirement account is a 401k or other retirement account, especially if the employer matches contributions. This is too good to pass up! Always take up this option before considering opening something else.
There’s nothing stopping you having more than one account either. Because there are limits to the amount you can contribute to a retirement account each year, a great strategy is to open different types of accounts to take advantage of the various tax breaks that apply.
SHOULD I PAY OFF DEBT, INSTEAD?
The other side of the coin is that a young person, just out of college, may have other calls on their money than saving for retirement. It could be that putting every spare cent towards paying off student loans and credit cards is the better option. If taking this action is going to save hundreds or even thousands of dollars in interest, this could be a better strategy than starting retirement saving straight away. Of course, when the debts are cleared, all the money that has been going to get them paid off can then be directed straight into retirement savings.
Not having a retirement savings plan is a recipe for financial disaster down the track. It’s important to make a start early, even if you are only contributing small amounts at the beginning, until you get on your feet. Create a personal budget so you can work out how much you can afford to save.
The key here is to get into the habit of regular saving; this makes it so much easier to continue throughout your working life.