For many of us, retirement feels light years away. And maybe for you, it’s a distant day in the future. Yet there is one thing that is consistent across people no matter their age or income: saving and investing as early as possible is best.
For many people, they can start saving as early as their mid-20s when school has been completed and they have their first full-time job. They’re able to upgrade from their college lifestyle - trading in ramen noodles for spaghetti - while still putting something away each month. While the majority of graduates have student loans, they can pay these off slowly while building their investments.
Here are just a few of the reasons why saving for retirement is so important, even at a young age.
- Americans are living longer
- Americans are retiring younger
- Traditional pensions are fading
- Social Security is not a sole source of income
Fortunately, saving for retirement doesn’t have to be complicated. Here are some tips for getting started.
Sign Up for 401(k) Plan
Many employers have a 401(k) plan that employees can sign up for. The money is automatically deducted from your paycheck before tax, and it’s rarely missed. The employer may even contribute a match up to a certain amount, resulting in even greater returns. 401(k) plans are hassle free and a great way to ensure that money isn’t being left on the table.
Sometimes, the biggest pay increases come early on during the first few years of employment. A portion of these raises should be placed in a 401(k) account to max out the contribution limit. This extra money should be viewed as that - additional income - so the best approach is to follow the “one-third rule.” One-third for the past (debts), one-third for the present (home improvements) and one-third for the future (retirement).
Open an IRA Account
Since there are yearly contribution limits for 401(k) plans, it’s a good idea to open an IRA for additional investing. IRA stands for “individual retirement account” and it’s basically a savings account that offers big tax breaks. Just be sure to familiarize yourself on the details of the account, as there are often penalties for taking out money before retirement age as well as caps on how much can be contributed each year.