When Should I Start Saving For Retirement? Now!

Have you put off starting your retirement savings because you don’t understand things like IRAs, 401(k)s, tax implications and contribution limits?

Don’t be afraid. Although sometimes those things can get a little technical, there are tons of websites with easy-to-follow advice and solutions you can use.

However knowing when should I start saving for retirement is a little bit of a tricky of a question. Lots of people are waiting for a tap on the shoulder or a nudge to let them know when to begin.

Out of all the questions you’ll ever have about retirement, the answer to this one is about as simple as it gets – start now!

When to Start Saving

The reason you should start saving for retirement as early as possible is because you’re going to want to take full advantage of one of your greatest assets, “time”.

You’ve heard of compound interest, right? If you invest $10,000 at the age of 22 and have an average annualized growth of 8% annually, you could potentially have $273,666 saved up by the time you’re 65 without ever doing anything else.

On the other hand, if you wait until you’re 45 years old to make that same investment into that same account, you’ll only have $46,610 when you’re 65 years old.

Do you see how starting early can help your balance to grow significantly larger over time? It’s possible that if you start early enough you could have a very healthy retirement starting as early as age 55 and never have to worry about money ever again!

Don’t Forget to Pay Your High-Interest Debt First

Of course, there are a couple of exceptions to this rule.

First of all, if you have high interest debts, you should pay those off first before you start saving up. After all, the only way you can guarantee yourself to get a 15% rate of return on your investment is to pay off that credit card that charges 15% APR.

The second exception is lack of a “rainy day” or emergency fund. You should have some funds set aside to get by with three to six months worth of unemployment before you start putting your money into retirement accounts where it’s less accessible to you.

How to Save Money for Retirement

There are lots of good ways to achieve financial freedom: Budgeting, investing, earning money on the side, etc.

By far and large one of the best and simplest ways I can think to save your money for retirement: Automate it!

If your company offers a 401(k), have a portion of your money go directly out of your paycheck and into that account. That way you never even see the money or think twice about what else you could have spent it on.

If it’s an IRA you prefer, you can also set up automatic transfers from your checking account to your IRA for easy funding.

The best way to allocate your money is like this:

  1. If your company offers one, invest into a 401(k), up to the matching program limits. (This will depend on the company you work for.)
  2. Put the maximum into your IRA, which is $5,500 (if you’re over 50, it’s $6,500)
  3. Put the maximum into your 401(k), which is $18,000 (if you’re over 50, it’s $24,000) in 2015.

Roth Versus Traditional Retirement Plans

Now, it’s time to look at the different types of retirement accounts: Roth and traditional. Though there are several differences between the two, the most important is the difference in the way taxes are handled between the two.

Roth accounts are funded with income after taxes are taken out. This means that there are no upfront tax benefits, but you will not have to pay taxes when you withdraw it.

On the other hand, traditional retirement accounts are funded with income before taxes are taken out. This means that when you get ready to withdraw it, you will be required to pay the taxes on that income.

How can you decide which of these options is best for you? If you’re just entering the working world, a Roth account may be better suited for you since you’re likely in a lower tax bracket. However, if you’re in a higher tax bracket and anticipate living on less income during retirement, then a traditional account may work out better for you.

Though this seems complicated and you may not want to deal with it, it will be worth it in the long run. You will be able to ensure that your golden years really are golden. Even if you make some mistakes along the way, that’s OK.

The important thing in knowing when to start saving for retirement is to start right away. Regardless of whatever mistakes you may be afraid to make, the longer you wait the steeper the hill you’ll have to climb later in life.

This post was written by my friend DW from The Money Template, a personal finance blog that talks about all things money related.

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  1. The only thing I disagree with is the recommendation to pay high interest debt before opening the retirement account. I understand your logic and it is sound, (paying out more interest than you are earning), but by postponing opening a retirement account, you loose the very compounding effect you discuss. Plus, if your employer matches any part of your contribution, you lose that free money for the whole time you are not participating in the plan. What I’d recommend is to do the retirement account AND work on the debt. Perhaps contribute a percent or two less to retirement and divert that to paying off the debt. One thing we do agree on is starting as soon as possible!

    • That’s a good way to handle it Kathy. Obviously tips like the ones I’m offering here in this blog post are never one size fits all. If you can adequately split your money between paying off debt and saving for retirement, then you should make an effort to accomplish both.

  2. Great post! Very succinct.

  3. Great post Lance,
    So important and you hear it everywhere but people still wait to invest. Gotta agree with Kathy too. Too many people say, “I’ll start investing when I’m out of debt,” which of course never happens. Shopping and spending is too much fun and most never fully pay off their debt.

    Compounding is so important. You can start investing just $100 a month at 25 years old and have $256,000 by age 65. Getting to that same point but starting at 35 years old and you’ll need to double your saving to over $200 a month. Wait until 45 and you need to sock away almost $500 a month!

    • I couldn’t agree more. Like you’ve pointed out – putting away something as small as $100 a month could have a huge impact on your savings later on in life. The common investor needs to know that “time” is their best friend when it comes to investing, and the earlier you start the better your chances will be. Whenever I run the numbers, it makes me wish I had started my IRA at age 16 when I got my first job!

  4. Great post here! The last statement you said is so true! I believe younger people should be more aware of this so they can have an early start especially once they get into the workforce. So many young people disregard savings because they think they’ll have the time for that in their 30s. I wish I knew how to handle my money better when I was in college.

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