The Importance of Saving for Retirement at a Young Age

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There are four very important advantages to begin planning and saving for retirement in your 20s.

1) Money management skills
Now that you’re on your own, it’s important to start taking responsibility for your finances. Part of developing financial responsibility is learning to balance future monetary needs with present expenses. Sometimes that means saving for a short-term goal (for example, buying a new car) and a long-term goal (for example, retirement) at the same time.

Once you become used to balancing your priorities, it becomes easier to build a budget that takes into account both fixed and discretionary expenses. A budget can help you pursue your financial goals and develop strong money management skills. If you establish healthy money habits in your 20s and stick with these practices as you grow older, you’ll have a major advantage as you edge closer to retirement.

2) Time on your side
You likely have 40-plus years ahead of you in the workforce. With that much time, why not put your money to work using the power of compounding?

Here’s a hypothetical example of how compounding works. Let’s say at age 25, you start putting $300 each month into your employer’s retirement savings plan, and your account earns an average of 8% annually. If you continued this practice for the next 40 years, you would have contributed $144,000 to your account, accumulating just over $1 million by the time you reached age 65. But if you waited 10 years until age 35 to start making contributions to your plan, you would have accumulated only $440,000 by age 65.

3) Workplace retirement benefits
If your employer offers a workplace retirement plan such as a 401(k) or 403(b), you may find contributing a percentage of your salary will make saving for retirement easier on your budget. Contributions are typically made on a pre-tax basis, which means you can lower your taxable income while building retirement funds for the future. You aren’t required to pay any taxes on the growth of your funds until you take withdrawals. Keep in mind, distributions from tax-deferred retirement plans are taxed as ordinary income and may be subject to a 10% federal income tax penalty if withdrawn before age 591/2.

Depending on the type of plan, your employer may offer to match a percentage of your retirement plan contributions, up to specific limits, which can potentially result in greater compounded growth and a larger sum available to you in retirement.

If you don’t have access to a workplace retirement plan, consider opening an IRA and contribute as much as allowable each year.

4) Flexibility of youth
Although there’s a good chance you have student loans, you probably have fewer financial responsibilities than someone who is older and/or married with children. This means you may have an easier time freeing up extra dollars to dedicate toward retirement. Get into the retirement saving habit now, so that when future financial obligations arise, you won’t have to fit in saving for retirement too — you’ll already be doing it.

“Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2016.”

 

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