If we had just one second to tell you when you should start saving for retirement, the answer would be simple: Now! But we’re going to assume we have more than one second, which allows us to get a little more nuanced and explain why today—make that yesterday—is the best time to get that nest egg going.
THE PRINCIPLE OF COMPOUNDED INTEREST
Let’s say Person A puts $3000 a year, which breaks down to $250 a month, into a tax-deferred retirement account starting at age 25. (Good job, Person A!) Then Person A saves at the same rate for 10 years and totally stops. If they’re able to get a 7 percent annual return, which is fairly typical, they’ll have grown their $30,000 to $338,00 by the time they’re 65.
Now, let’s look at Person B, who starts saving the same amount of money per year when they’re 35 and continues until they’re 65. Person B will have socked away $90,000—and will end up with about $303,000 at the same rate. Do we need to say it? You want to be Person A.
ABOUT THAT 401(K) …
The dream of getting a pension a la Grandma or Grandpa? That flew out the window decades ago. Now that companies largely don’t provide traditional pensions, employees are responsible for coming up with ways to save for retirement. Some companies will provide a 50 percent match for up to 6 percent of your paycheck per cycle that you invest in your 401(k). That’s basically free money—not to mention, the money you earmark for your 401(k) comes out of your check pre-tax, saving you even more. The only thing to note: You’ll be taxed heavily if you take out money before retirement age, which in the end is for the best, because you’ll be sure to leave it alone.
IRAs FOR THE W-I-N
If your company doesn’t have a 401(k) plan or if you’re self-employed, don’t fret. You can look into opening an Individual Retirement Account, or an IRA. This functions more or less as a savings account with big tax breaks. In a typical IRA, you can save money without paying taxes on the front end—when you take out the money, you pay tax then. In a Roth IRA, it’s the exact opposite. You pay tax up-front, then enjoy tax-free withdrawals in retirement. Roth IRAs also have more flexible rules for withdrawing money early. And in both cases, the money continues to grow tax-free the entire time it’s in there.
FINANCIAL PLANNERS ARE YOUR PALS
Above all, don’t be paralyzed by indecision or fear. If the idea of paperwork and numbers overwhelms you, hire a financial planner to help out. Most work on a percentage basis, so you don’t have to pay them up front—perfect for the saver who’s just starting out. To find a qualified planner near you, search the web, or ask family and friends for suggestions. Then start reaping the rewards.
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