At the age of 25, the first thing on your mind probably isn’t your retirement. But, at your age, no matter what it may be, retirement should be something you have at least thought about for a minute and have done something to prepare for.
If retirement is the furthest thing from your mind, consider these reasons to start not only thinking about retirement, but acting and getting accounts set up specifically for retirement.
Be Informed on Basic Accounts
Before you jump into deciding what to do to help your retirement, here are a few terms you should familiarize yourself with.
401K – The Wall Street Journal explains 401K accounts as an account your employer sets up. It allows you to save a portion of your paycheck before taxes are taken out. Here are a few other facts about 401K plans.
- Taxes on this money aren’t taken out until the money is withdrawn from the account.
- You control how much money is invested.
- There are specific rules as to when you can actually access the money and sometimes how long you have to be at a company to actually receive the money.
- Most companies will put in a certain percentage of your salary. If you financially can, match what they put into the account, making the most of the investment.
IRA – Fidelity.com explains that an Individual retirement account is another account that allows you to save for retirement. There are three different kinds.
- A traditional IRA is invested with money that you haven’t paid taxes on yet.
- A Roth IRA is invested with money you have already paid taxes on.
- A Rollover IRA is a traditional IRA that is used from money that has been moved from a 401K plan.
If your employer contributes to one of these accounts, they typically contribute to a 401K, but can contribute to an IRA. An IRA works as another account set up to help you save even more money for retirement.
Why Should You Start Now?
When it comes to retirement, one key benefit is starting early. CNN Money explains why it is so important to start early through this example. If you put $3,000 a year for 10 years starting when you are 25 and then stop, you will have $472,000 saved by the time you are 65 (assuming an 8% return). If you start at 35 and put $3,000 for 30 years, you will have $367,000. The return off the $30,000 invested earlier is considerably higher than the $90,000 you put in over 30 years.
When you look at the numbers this way, it seems pretty easy to understand why starting early is so important. Breaking down the numbers makes it clear why it is so important to start as soon as you possibly can. Forbes.com reported that of people born between the years of 1980-2003, 60% of them didn’t think about retirement at all! To ensure you have the money necessary to live comfortably in retirement, start thinking about it now!
Don’t Depend Solely on Social Security
We have all heard that social security will shortly not have enough funds coming in to pay the benefits needed. According to CNN Money, in 2041 the younger generation could face a 22% reduction in payouts, with more reductions likely. When calculating what you need to retire, don’t plan on social security. Invest and save as much of your own money as you possibly can. Having enough retirement to live comfortably is entirely up to you.
Having Wisdom Beyond Your Years!
Preparing for retirement doesn’t mean that you have to go into debt or live like church mice now. Before you start saving for retirement, make sure you can make all your monthly bills. It is also a good idea to make sure you have money set aside into an emergency fund. Look at your budget to make sure you can afford the amount you decide to put into retirement.
US News suggests you also calculate how much money you will actually need to live comfortably in retirement. The number you will need will be surprising. Some people figure they need over 1 million to live like they are now; others might only need $250,000. Most financial advisers agree that to live comfortably in retirement, you should set aside between 6-15% of your annual income into a retirement account. If your employer contributed to a 401K, try to match their contribution to make the most of the investment. That is an easy way to get to that higher percentage without investing all of the money yourself.
If saving for retirement is overwhelming, US News suggests doing what you can. If you can only do $1 now, that is fine. Increasing retirement as your income increases is an easy way to save for retirement. Something now is better than nothing at all!
As previously mentioned, starting early is the key to retirement. Whether you are still in your 20s or not, start today. No matter what your age, starting now will make retirement more comfortable. Talk to your employer, a financial planner, or someone you trust to help you make the best decision on accounts that fit your retirement needs. Don’t expect that you will somehow have the money necessary to live how you want in retirement if you don’t take the necessary steps today to ensure that!