It’s the American dream to retire early and enjoy one’s golden years. Starting a retirement plan sooner than later is the best way to get your foot in the door. These days you can even start a retirement plan on your own.
It’s hard to make retiring a priority at a young age when other immediate goals take precedence. Millennials seldom consider the financial impact opening a retirement savings account can do.
If working well past 60 sounds terrifying, opening a retirement savings account, such a 401(k) or Individual Retirement Account (IRA), is essential. Financial experts warn that not starting early can hurt or complicate the potential to build up a sufficient retirement account.
Unfortunately, social security is not enough to support individuals without a backup plan. Ideally, starting to save in your 20s can generate the most return on investment. Not only is putting money aside critical for a secure future, but there also are many financial benefits.
Make Your Hard-Earned Money Work for You
Saving money for retirement is where the power of compound interest comes into play.
Compound interest allows saved earnings to grow at a faster rate, especially when started early. This financial advantage derives from and adds to the accumulation of interest from previous periods.
For example, an investment of $1,000 at 5 percent interest makes $50 per year. With compound interest, that $50 would then be reinvested and become part of your retirement investment account. Simply put, compound interest is the “interest earned on interest” previously accumulated that you have reinvested.
Financial advisors stress just how important it is to have an early start saving for retirement and how it should take priority. Specifically, millennials should be already looking into getting started. It’s understandable that student loans and everyday living take a toll on funds, but opening a retirement account now is a major factor that determines how secure your financial future is. This is how compounding interest benefits those who invest over longer periods the most.
You Will Regret Procrastinating on Your Retirement Plan
Essentially, the earlier you start a retirement plan on your own, the more money you will have upon retiring. Even if the initial investment is small, it is still the better option.
Young professionals who are putting money into a retirement account usually don’t contribute a large enough portion of their pay. This is why starting as soon as possible is beneficial to the end goal of retiring comfortably. With a savings account like this doing the grunt work for you, it only makes sense to invest now.
Getting a head start puts you ahead. If you spend the first half of your career without a strategy for saving, there will be a lot of catching up to do later in your career. Not to mention, you may not have the ability to invest in the market later in life due to any financial fluctuations or emergency expenditures.
For example, to reach $1 million by age 65, you would need to start saving $4,500 yearly at age 20. At 30 years old, you would need to save double that amount per year to reach the same goal.
Your earnings also have the potential to grow a substantial amount if you chose to invest in a stock market mutual fund. Although investing in stocks for retirement is a powerful tool, help from a financial adviser is vital, as there is always risk involved.
A Way to Save and Get a Tax Break
A retirement savings account also has the great incentive of qualifying for a tax break.
Contributing to a 401(k) retirement plan is tax-deductible. According to the IRS, employee contributions can reduce current taxable income. Also, contributions and investment gains are not taxed until distributed.
If you’re in the 24 percent tax bracket, you save $240 per $1,000 you contribute to your retirement account.
When investing in an IRA, up to $6,000 can be put in per year for the 2019 and 2020 tax years. This income is pre-taxed. Therefore, your taxable income is reduced by the amount you pay in. The invested funds will grow tax-free until you withdraw them when you retire.
It is important to note that the IRS limits your contribution amount each year. For people under 50, that limit is $19,500 in 2020. If you’re 50 or older, the limit increases to $26,000 yearly.
Retirement Planning in Summary
Start taking a retirement savings account seriously and you will have yourself a nice cushion for when it’s time to bid your career adieu. Additionally, it is recommended to consult with a financial advisor that can help you navigate through the options.
Taking the initiative to map out a plan for retirement is a game-changer. Make it easy for yourself and work your money smarter, not harder.