How to Start Saving for Retirement and Why You Should Start Young

Retirement planning is an essential part of financial stability, and it’s never too early to start saving for your future. As you plan for retirement, you may be wondering, “How do I start saving for retirement?” or “How soon should I start saving?” Those are important questions that can help you create a solid retirement plan. In this article, we will explore some tips on how to save for retirement, including the benefits of starting early and the growth potential of your retirement savings.

Although it’s never too late to begin saving, an early start can give you a real boost toward reaching your financial goals. If you want to keep a comfortable retirement, a house or college education within your reach, the question is can you afford to wait?

The growth potential of your retirement savings depends on several factors like the amount you save, the length of time you save and the investment strategies you choose. However, it is important to understand that retirement savings growth is not guaranteed.

Start saving young

One of the most crucial aspects of saving for retirement is starting early. The earlier you start, the more time your money has to grow. If you wait until later in life to start saving, you need to save a lot more to make up for lost time.

Among all the financial obligations competing for a piece of your paycheck, it may seem nearly impossible to find extra money to start saving. But the key is to think of saving as another basic expense in your budget. Planning ahead and making saving a habit will guide you in the right direction. Don’t look for savings in what’s left over after spending; often there isn’t any. Instead, treat your savings like your rent payments, and put aside a set amount each month (or week). Over time, even small amounts can make a difference.

In addition, when you start saving young, you’re invested longer and can potentially benefit from the power of compounding. Compounding occurs when the earnings from investments are reinvested and produce more earnings. Each year’s gains can build on those in the past, potentially increasing the overall growth potential of your investment.

Here is a hypothetical example on why you should start saving young. This example helps show how much your retirement savings can grow.

At age 25, Suzanne begins saving $150 per month for retirement. After 15 years, she stops contributing but leaves the money in her account for the next 25 years. Assuming a 6% average annual rate of return, by age 65, Suzanne would have amassed $194,775, which cost only $27,000 in total contributions.

On the other hand, just as Suzanne stops contributing, Henry begins. He puts aside $150 per month for the next 25 years. Assuming the same 6% average annual rate of return, at the age of 65, he has contributed a total of $45,000, yet his account has $90,826 less than Suzanne’s.¹

Take advantage of employer-sponsored retirement plans

If your employer offers a retirement plan, such as a 401(k), take advantage of it. These plans allow you to save for retirement with pre-tax dollars, which can reduce your taxable income and increase your take-home pay. Additionally, many employers offer a matching contribution, which is essentially free money.

When you contribute to a 401(k) or other employer-sponsored retirement plan, your money is invested in a variety of funds, such as stocks, bonds, and mutual funds. Over time, the value of these investments can grow, providing you with a nest egg for retirement.

These frequently asked questions about 401(k) retirement plans can help you during your savings journey.

Consider a Roth IRA

A Roth IRA is a retirement account that allows you to contribute after-tax dollars, meaning you pay taxes on the money before you contribute to it. However, when you withdraw money from a Roth IRA in retirement you won’t owe any taxes on your earnings. This can be especially beneficial if you expect to be in a higher tax bracket in retirement than you are now.

Like a 401(k), a Roth IRA allows your investments to grow tax-free, which can help your retirement savings grow faster. Additionally, Roth IRAs have fewer restrictions on when and how you can withdraw your money than traditional IRAs, making them a flexible retirement savings option.

Ameritas can help. If you’re still wondering how much your retirement savings will grow, speak with a financial professional.

¹ This is a hypothetical example used for illustrative purposes only. It is not representative of any particular investment vehicle. It assumes a 6% average annual total return compounded monthly. Your investment results will be different. Tax-deferred amounts accumulated in the plan are taxable on withdrawal, unless they represent qualified Roth distributions.