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How Important is it to Start Funding Your Retirement Early?

by Kevin Mercadante

When you’re in your 20s and early 30s, funding your retirement isn’t always a top priority. But it should be. If you can begin funding your retirement early you won’t have to worry about it nearly as much as you get older. And there are plenty of reasons why you’ll want to do this.

Life Won’t Get Less Expensive Later

Start funding your retirement early

You only get one shot at funding your retirement!

Many young people assume that there will be time for saving and investing “later”. They reason that they have enough expenses to deal with right now, and as they get older and move up the career and salary ladder that they’ll have plenty of money to save for retirement later.

The problem with that thinking is that you will always have expenses. If anything, your expenses will grow as you get older. You may get married, you may have children, and you may buy a house, and all will increase your expense levels. Sure, your income may rise, but so will your expenses. Expenses have a way of increasing with income anyway.

There’s no time like now when it comes to saving and investing for retirement. When you are young you are also establishing habits. Saving and investing for retirement is one of those habits. People who adopt the habit early are usually the winners at the retirement game. And some people who don’t never do it at all!

You May Need to Pause Your Retirement Funding

Whether you start funding your retirement early or at a later time, the day may come when you will need to take a break from funding your retirement. This can happen due to a period of unemployment, a time of very high expenses, or a move into an occupation that does not offer a retirement plan. Such a time can last anywhere from a few months to a few years.

The earlier you start funding your retirement the better you will be able to deal with a break. Let’s say that you began funding your retirement when you were 25. At age 35 you decide to leave your job and start your own business. It will be at least five years before you’ll be able to have a retirement plan for your business. But in the 10 years that you were saving money for your retirement you accumulated $100,000.

Even if you don’t add any additional money to your retirement fund, assuming an 8% rate of return, your retirement portfolio will grow from $100,000 to $146,933 in those five years, just from investment returns alone. Your retirement fund will grow by over $9,000 per year without you doing anything!

The results would be very different had you waited until you were 30 to begin funding your retirement and only had, say, $40,000 saved. It’s always a good idea to invest as much as possible, while you are able.

You May Want to Retire Early; or You May be Forced to

Another factor to take into consideration is early retirement, or a retirement brought on by the loss of a job. In either case, you will be better prepared for the event if you start funding your retirement very early in life. For example, if you start funding your retirement at age 25 and you decide to take early retirement at 55, you’ll have had 30 years to build up your retirement assets. If you waited until you were 40 to start saving, you probably won’t be able to retire and will have to keep working until you can.

When you decided to begin funding your retirement will have had the major impact on being able to retire early or not. Funding your retirement early equals more options later.

How Much Difference Can a Few Years Make?

You’re 22 years old, right out of college, and you begin saving $5,000 per year for your retirement, earning an average rate of return of 8% per year. By the time you’re 65 years old, you have $1,718,499.

If by contrast, you wait to begin retirement savings at age 35, saving $10,000 per year with an average annual rate of return of 8%, you will have $1,181,340 by the time you’re 65. Even though you’ll be saving twice as much money as you would have if you started saving at 22 you will still retire with about one third less money!

The difference between the two scenarios is that if you start when you’re 22, you have 43 years to save and to earn investment income. If you wait until you’re 35 you’ll have just 30 years to save. That extra 13 years of compound interest–at 8% per year–makes all the difference. This is why it’s so important to start funding your retirement early.

The One Exception – Sometimes

There may be one exception to funding your retirement early, and that is debt. A lot of people have substantial debt in their 20s and early 30s owing largely to student loans. But there can also be car loans, credit cards and other forms of debt on top of that. The combination of debts can make living difficult and leave very little room for retirement savings.

If that’s the case, you will need to deal with those debts immediately. Not only will paying off those debts make your financial life easier, but they will also provide extra capital to fund your retirement. The sooner that you can pay off at least some of them the more money that you will have for retirement savings.

Even if you do have debts that need to be paid off, it will still help to save at least a little bit each year for retirement. Starting early is the key to finishing strong when it comes to retirement. Don’t miss out on your early years as an opportunity to begin preparing for that strong finish.

How old were you when you began seriously saving for your retirement?


Published or updated December 5, 2012.
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