The earlier you start saving, the better, says online trading and investing company Merril Edge.2 Why? Earlier savings mean you see more growth in your compound interest (or the “ability of your assets to generate earnings, which are reinvested to generate their own earnings”).
For example, Business Insider says that a 25-year-old who invests $5,000 per year until age 65 and sees a seven percent annual return will be a millionaire by the time he retires.3 Even if you haven’t been saving that much since age 25, the point is to save as much as possible, as soon as possible.
According to the U.S. Department of Labor, you could need anywhere from 70 to 90 percent of your “preretirement income” to continue the same lifestyle you enjoy during your working years.4 Analyze your current budget to help you set your retirement savings goals. How much of that budget is work-related? Are there any personal expenses you could decrease or eliminate to save more for your retirement?
Both 401(k)s and IRAs have contribution limits for workers under age 50—$17,500 for 401(ks) and $5,500 for IRAs. Once you’re 50 or older, however, you can contribute larger amounts—$23,000 for the former, and $6,500 for the latter. This lets you play “catch-up” if you didn’t save as much as you would have liked in your earlier years, says Merril Edge. If you qualify for Social Security, waiting longer to apply for your social security payment can also be profitable; compare receiving $24,000 at age 66 with receiving $31,000 at age 70.
It’s common to see retirees celebrate the end of their work history with a big purchase, like a lakehouse or a new car. However, to keep your retirement funds intact, it’s better to make these purchases when you’re still working. If you don’t, you may find yourself in debt if something unexpected, like an accident or medical emergency, occurs and you don’t have sufficient funds to pay the resulting bills.
Retirement planning can take a lot of work, but doing no planning at all could leave you in a less-than-ideal financial situation once you’ve left the working world. These tips can get you started in thinking about your retirement goals. For a more in-depth evaluation of your financial situation, it may be a good idea to consult with a financial planner, but regardless of how you think about retirement, just remember: It’s never too early to start saving.
1 http://www.us.jll.com/united-states/en-us/services/corporates/facility-management/millennial-talent2 http://www.merrilledge.com/article/10-tips-to-help-you-boost-your-retirement-savings-whatever- your-age-ose3 http://www.businessinsider.com/compound-interest-retirement-funds-2014-34 http://www.dol.gov/ebsa/publications/10_ways_to_prepare.html