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!
Retirement (Photo credit: 401(K) 2012)
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.
I first started contributing when I was 22 or so – my manager at the time told me about her own RRSP contributions and how she “only had to put away $50 a month”. She was an inspiration to me in a lot of ways (successful career woman with husband, did show riding competitions, owned a house in Vancouver, etc), so it really got me to actually start thinking about retirement.
Having a good example definitely helps. I know I too have seen what others have accomplished and been inspired to follow in their footsteps. Good for you for having the insight at 22 to get started with saving. You are well beyond many your age and older. You though will reap the rewards from thinking ahead.
Although you should contribute to retirement accounts as early as possible, Savings is the most import habit to help you get to your financial goals.
I agree. Retirement is just one kind of savings and other types of savings are also important. However, I do find that many, including myself in the past, put retirement saving on the back burner and don’t make it the priority it should be. This catches up to us and sometimes sneaks past us to the point where we can’t recover.
“Are you in your early twenties?” – yep.
“just starting out in your first full-time job?” – second.
“I’ll bet the last thing on your mind is your retirement!” – wrong.
I realize I’m an outlier, but I’ve been bitten by the financial independence bug. Now my motivation is frugality to get enough money to have more freedom. One will do very well if they can squirrel away 70% of after-tax income and fight off “lifestyle inflation” …
I agree Greg and good for you. You are definitely an inspiration as many 20 somethings don’t have this kind of mindset. If you can get used to fighting off inflation and overspending in your 20’s, then you will be that much better off later. Keep up the good work and don’t ever change that independence attitude. It is a great one to have.
We sound so similar! I was bitten by the financial independence bug around the beginning of 2012. Since I started my job at 22 I’ve been putting money away for retirement, but this was the year it hit me that I could be doing so much more! 70% of your after tax income is great! I’m not quite there, but with a few adjustments to my spending, hopefully I can follow your lead!
I am not there yet either but I hope to be.
Are you older than 8? Then worry!
Just kidding, but only a little. This is really not rocket science: those who start early do a lot better. You don’t need to do it perfectly, an early start gives you lots of margin for error.
I started too late, because I didn’t know better. But when I got it, I went for it with all I have to get my Drop Dead Money (enough money to tell my bosses to drop dead – just a fun term for independence).
The good news is: even if you start late, you can still do it… with one caveat: You HAVE to pay attention to the economic cycle. Investing at the top of the market can set you back and discourage you. You have to know where we are in the economic cycle and invest accordingly.
I would agree. It isn’t all over if you don’t start early but it sure does give you a boost. Knowing the markets is critical because if you do start later you have less time to make up your losses.
Good thoughts, Miss T. Wish I had had the same mindset in my 20’s.
I have learned my lessons 101. I didn’t start out as well as I should be that doesn’t mean others can’t. We can learn from what others have done right?!
Man, I wish I had started saving for retirement in my early twenties. If I could take those few years back, I sure would. Unfortunately, there is no do-over.
When I was in my 20’s, I didn’t think that I could afford to save for retirement. (I could, however, spend a bunch of money partying every weekend.) However, I did see the light in my early thirties and we are pounding the 401k and our debt. Thank goodness for my wife and for maturing quickly enough to fix my mistakes:)
Don’t beat yourself up too much. Starting in your early 30’s is still good. I too didn’t start as early as I should have and have learned my lesson. What I can do is, like you, tackle saving aggressively now and see what kinds of headway I can make.
“Not having a retirement savings plan is a recipe for financial disaster down the track.” Agreed.
Anything you can save, when you’re young, is great. It just saves you from literally saving more when you are older. Start early, start often, and keep the plan going. Easy to say, hard to do.
I recall I started my RRSP in my early 20s. I didn’t really get contributing to it consistently until my late-20s. Alas, such is life 🙂
Good post Miss T!
I am the same way. I didn’t get as serious about my RRSP’s until later either. At least I started in my 20’s though. Better than 30’s right. Learning from others mistakes is so important which is why I wrote this article.
It’s like exercising a keeping fit. Doing the right things each day, over time, can result in a noticeable impact down the line versus those who don’t take care of themselves. If a younger person can regularly go to the gym and stay fit, that same person can make the regular, disciplined decisions necessary to save for retirement!
I love your analogy. That is so true. I work out every day and make an effort to live healthy so why would my finances be any different. I think many youth can relate to exercising and staying physically fit so getting them to realize how to get financially fit isn’t a far stretch. Things do add up over time.
I cannot understand why there are people who do not think about their retirement. A lot of young people does not realize the fact that the earlier they start saving for their retirement, the more money they will have, the better when they reach retirement age. Basic math, isn’t it? I totally agree with you in saying that no retirement plan is a financial disaster in the making.
Common sense isn’t so common right?! Even simple math is not understood by some surprisingly and this is why people end up in the situations they are in. People need to get the basics right and use that as their foundation.
Hi Miss T,
Thanks for the great post. I started putting into retirement when I got my first “real” job out of university, as the corporate retirement match was too good to pass up!
Since I did my shift toward entrepreneurship, I’ve shifted toward building income, and as it stabilizes and increases, I’ll start putting some back toward retirement once again.
Sounds like an ok plan to me. The only thing I would wonder about it interest losses. By taking time to increase your income and not save, you are losing dividends and interest gains.
Glad you started out when you were young. We have a corporate pension too and I too have been contributing to it since I started working.
I agree. In one sense, I might have lost about a year of retirement by leaving my day job to pursue my own dreams (meaning I’d have to work about one more year to get back to the same place, if I’m unable to boost my income significantly).
On the other hand, this path may give me financial independence at an earlier age than I originally thought. That was part of the risk & reward of taking the leap 😉
I am always a big fan of following your heart because I think it is the only way one can truly be happy in the long run. If following your heart means having to work a bit longer than hey, you end up still happy in the end.
Personally, I’m not a fan of worrying about retirement at all. That doesn’t mean that it shouldn’t be planned for. It definitely should. Worrying just won’t add any advantage in the vast majority of cases. Personally, I am a fan of eliminating debt, but if you are sacrificing investing for your retirement to pay debt off, repayment should be done very efficiently way. Great post. Welcome Miss T.
True. Being debt free definitely adds some advantages to your financial future. Worry ing can also have negative effects and not be as productive. However we do need to feel a need to save for the future. If we don’t we won’t.