- Money -
saving for retirement
by fergus mellon
If you plan on retiring at 45, save for retirement. If you plan on retiring at 70, save for retirement! Regardless of your retirement age goal the sooner you can save for it the better, even if it is just 5% of your annual income in your first few years do it. View putting the money away as an insurance policy, even if you think you will love work and never want to retire there may come a day when you are too ill to work or you loose your job and cannot get another one. If you want to retire at all (and I know that the day cannot come too quickly for me!) the sooner you start, the more likely you are to achieve your goals.
While 5% of $40,000 a year (or whatever your first salary is) does not sound like much (and at $2,000 a year it really ain't a lot to save), assuming that it doesn't grow by much more than inflation then in today's money you will have over a period of 45 years saved $90,000 enough for a couple of years retirement (you will hopefully also get Social Security assuming it is still around so should be able to stretch your savings to fund a few more years of retirement). In addition to the bald savings there is the magic of "compounding". There are many other books out there that will talk about compounding (basically adding the investment gains every year as the stock market goes up and as dividends are re-invested which over a long period of time is very powerful) that means that your small 5% every year will be worth a lot more. Do a web search on the topic to get a bit more information on the value here as I do not claim to be a financial advisor. Suffice to say every penny counts and the earlier you can save the better. And if you can do 10% do it, using simple math (without the magical compounding) you will be able to have 4 years retirement assuming your income doesn't grow (I really hope that it is not the case!). We all want more than 4 years though, right? So we all need to save a lot so start early.
I want to retire, and to meet my goal I max out on both my 401K and Roth IRA contributions every year. Sure I am not in the early stages of my career so I can afford this but the more I save today the more I will have later on. Also the more I save today, the more simple my life is. This means that I do not need to fund a BMW, Rolex, vacation home, leisure boat or something even more exotic so this is a double win: my simpler life means I will have more saved and need less in my retirement.
Power of a Good Match: It is also really, really worth saving into a 401K if your employer matches your contributions. If not you are leaving money on the table and you will regret this. I would put not taking advantage of your employee match in the same bucket as not taking your vacation allowance or not taking your full salary: you are leaving an important part of your benefits package on the table.
Going back to the hypothetical example of saving $2k year, at a 50% match you are leaving $1k/year on the table which over the course of 45 years (again keeping it simple and not incorporating the magic aka "compounding") will mean an extra year at least ($45k).
And another thing, if you think it sounds really small in terms of the potential amount you will have saved at 5% or even 10% deductions, I agree with you! The sooner you can start saving at 15% (or maxing out your 401k contributions) the better. You will be preparing yourself for a fantastic retirement and if by some fluke you find that you have saved too much (highly unlikely) then you can always retire a year or two early.
I do not claim to be an expert in managing money. If you are interested in learning more and becoming sophisticated in this area I really recommend you invest the time in reading "I Will Teach You To Be Rich" by Ramit Sethi. Despite the title of the book, it is not a get rich scheme but instead a step by step (and exceptionally accessible) guide to managing your money to meet your long-term goals.
Related columns: Start Retirement Saving Today.
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