The Sooner the Better!

It’s just simple math really: the younger you are when you start saving for retirement, the less money will have to be allocated for that goal each year.

For most young people, the idea of retirement is so remote that it never really crosses their minds; neither does any other aspect of financial planning. People typically wait until they are married or home owners to buy life insurance and sometimes by the time they do they may have already acquired a health issue and are surprised at the cost of the insurance and wish they had started sooner. It’s the same thing with retirement planning. Many people wait until they are “settled” in their careers and after a few jobs and a few layoffs have nothing to show for the time they worked. Or they simply put it off and use the money they could be saving for the future because they have to have their dream car now. They get into leases or payments that take up a big chunk of their monthly net income leaving very little for savings. Regardless of the reasons, it usually hits a worker or business owner later in life that they wish they had started sooner.

When looking at what will be needed to be able to retire and all the factors that make the prospect of having enough saved upon retirement difficult at best, it is imperative that a young adult take the idea of putting money away for retirement seriously. If that means spending less on weekends out each month with friends or not buying that latte at Starbucks, not buying a brand new car (a bad financial move that will be discussed in another article at another time) or avoiding other expenditures which will put undue pressure on financial resources, then the smart money is on savings.

The proof is always in the pudding. Suppose a 23-year-old woman just starting out in life, living at home with the gracious consent of her parents, gets a career starting position with an online news source for her community. Let’s also suppose she takes the advice of a neighbor, a financial planner, to start saving for retirement now. Let’s assume this same person puts away approximately $250 per month every month until she is 65 — never increasing the amount but steadily invests. Also let’s assume over the 40 years she is putting money away she averages a seven percent rate of return on the investments she makes. By the time she is 65 years old she will have saved approximately $1 million.

If she waited until age 35 when she is more settled in her career and on her own (perhaps with a family of her own) and starts to put away money with the same goal of $1 million when she’s 65, then the amount that she would have to put away would be $555 per month. Now with mortgage and bills and kids and dogs and cats and all the other expenses of the real world, it may be difficult to put aside that much money, so a lower amount may only be able to be saved and the $1 million goal may never be reached.

What if life simply gets in the way and our 23-year-old waits until she has a higher paying position and now she starts saving for her retirement at age 45? Now we are looking at having to put away $1035 per month, which may be even harder to do while also saving for college or paying down a bigger mortgage, a car payment and all the other expenses that a middle class family faces each year. What if she gets laid off or takes time off from her career? Then the catch-up is going to be even greater and more costly. But if our intrepid young lady starts now then as she ages additional amounts she invests for herself will assist her in putting away more than her $1 million goal.

But there are other advantages as well. When younger and just starting to put money aside for long term goals such as retirement, a more aggressive investment program can be used which will provide the opportunity for higher potential gains. The later in life a person starts investing, the less risk they are apt to take and therefore the lower potential return.

A younger investor will also get the most out of alternatives to traditional retirement savings. For instance, building up a million dollars in a Roth IRA would provide a great source of TAX FREE income in retirement. In addition, combining retirement planning with life insurance, a person can purchase an inexpensive insurance plan which will build life insurance and cash value which can go toward tax free supplemental retirement income as well as a much lower cost of insurance.

It’s a shame these days that more adults don’t talk with their children about these matters and like many of us learn the lessons of finances too late. Wouldn’t we all be a bit more secure if we started our planning for our financial lives in the beginning rather than in the middle? The advice of a good planner can help steer a young investor toward suitable investments which can meet the goals and objectives of someone just starting out and keep them on track for the long haul.