Save Early and Often
Save early and often – it is likely that the majority of young households will have little discretionary income each month, and the tendency is to put off saving. When you are young, and have your first real job, probably the last thing on your mind is retirement.
Then, before you know it, you are 30 and have a mortgage and a couple of kids. You have probably considered saving for retirement, but can barely make ends meet as it is. By the time we reach our 40s and 50s, retirement is becoming very real, yet many still put off saving. They assume they can wait to save for retirement and that they’ll just be able to make up the difference later. They figure they will start saving for retirement after other big obligations such as home loans and children’s educations are paid for.
Costly mistake
This can be a costly mistake because they are giving up one of the most important savings tools available: time! Compounding interest really does have power. Each little gain generates further returns, and money invested consistently will grow exponentially over time. An individual starting at age 25 will have to save 15% of their income until age 65 to achieve an 80% income replacement rate in retirement. That’s 15% for a 25 year old. that saving rate jumps to 24% for those who start at 35, and 41% for 45-year-olds!
Save Early and Often
It’s never too late to start. But waiting too long to start saving can make it very difficult to catch up. Delaying even just a few short years can make a big difference in one’s total accumulation. Looking at it another way, assuming an average return of 6% year compound monthly, to reach $1 million in retirement savings by age 65, someone would need to save $363 a month beginning at age 20. Delay until age 30 and the contribution rate almost doubles to $702 a month.
Establish retirement goals and priorities
Retirement savings is about establishing priorities and making choices – and there will be always hard choices to make. Every stage of life has its financial challenges, and there will never really be an ideal time to start saving, but young clients need to be educated that they can’t afford to wait.
It doesn’t have to be complicated; young people should start by investing in their company’s 401k and an IRA. At the very least they should be investing enough to get the company match – what e call “free money’. Then they should set up their plan so that the contribution rate increases annually or with each raise. Most experts who have done the math place the recommended savings contribution rates between 15% and 18% of earned income, depending on income level and other assumptions. Incidentally, the number is higher for women, who generally have longer life span over which their retirement assets have to last.
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