Investing early for retirement can seem like a daunting task. But it’s a crucial step towards securing your financial future. Kickstarting your savings with enough time will help you build a nest egg that is large enough to pay for your retirement. Let’s break down the potential benefits and obstacles that you could face when saving early.
A financial advisor can help you create a financial plan to cover your financial needs and goals.
Understanding Early Retirement Investment
Early retirement investment typically begins in your 20s, or as soon as you start earning income. The basic idea is that you put money from your paycheck into a retirement saving account that is tax-advantaged so that you can grow that savings with compound interest. And through strategic investment, you will be able to build a nest egg that is large enough to pay for your retirement expenses.
When Should You Start Investing for Retirement?
Ideally, you will want to begin as early as possible. But there is no one-size-fits-all solution. So if you aren’t able to do so early on, it’s never too late to start saving, as there are other strategies to help you catch up.
But if you can save early, keep this fact in mind: Investing in a retirement account for a longer period of time will increase how much money you will have accumulated.
As a guide, T. Rowe Price says you should have invested 0.5 times your income by age 30. And if you’re looking to retire at age 65, the investment giant estimates that you should aim to have 13.5 times your pre-retirement income saved.
And, according to another study from Vanguard, account holders between ages 25 and 34 have saved roughly $37,000 on average.
What Are the Benefits of Investing Early for Retirement?
If you are on the fence about kickstarting your retirement savings, here are four key benefits you should consider:
- Better potential returns: The earlier you invest, the more you can earn. As we explained earlier, this is due to compound interest, which allows your investment to earn interest and that interest also earns more interest.
- Tax-efficient growth: Early contributions to a retirement savings account can reduce your taxable income and allow for tax-free growth. Contributions to a 401(k) or traditional IRA, for example, can be tax-deductible. However, if you are covered by both or more than one employer-sponsored plan, your modified adjusted gross income (MAGI) will determine how much you can deduct.
- Plenty of retirement savings options: Whether you put your money in an individual retirement account (IRA), a Roth IRA, or a 401(k), among other retirement savings plan options, each account has specific tax advantages that can benefit your savings upfront or later.
- Get more for less: A little savings each month can pay off big over time. For example, if you invest as little as $200 a month, it can grow into more than $150,000 in as soon as 20 years. And if you contribute that same amount for another two decades, you could have more than $1.2 million.
What Are Some Obstacles to Early Retirement Investing?
Saving money early for retirement can be difficult, especially when you’re trying to pay off college loans or are spending too much money on rent. Here are four common obstacles that you will have to overcome to save early for retirement:
- You’re trying to save without a budget. A retirement budget can help you get a clear idea of how much you are spending and how much you can afford to save. You can beat this obstacle with a simple step: List all of your monthly expenses and then subtract them from your monthly income. This will help you estimate how much you can save for retirement.
- You’re waiting to earn more money. Obviously, make sure you are paying your bills and paying down debt. But every day, month and year that passes you by is a missed opportunity to boost your nest egg. Get over this obstacle by saving a little. Even $50 can add up to $600 in one year. And this money can earn you more through compound interest in a retirement savings plan
- You don’t have any savings goals to measure against. Saving for retirement is just like any other goal: You can hit your target when you have something specific to reach for. You can beat this obstacle by setting a monthly savings goal. And if you need help keeping up, you might also consider making automatic contributions to a retirement plan, if available.
- You are outside of your comfort zone. It can be difficult to adopt new habits. But the success of your retirement savings will depend on consistency. Therefore, break down your new savings plan into steps and ease into it with simple goals. And as time goes by, build up to reach bigger milestones.
The sooner you start saving for retirement, the more likely you are to secure your financial future. Early retirement savings could potentially yield higher returns through compound interest and long-term tax benefits. But regardless of your age and financial background, the most important goal for your retirement savings is to just get started.
Tips to Save for Retirement
- A financial advisor can help you set and reach your retirement savings goals. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- SmartAsset’s free retirement calculator can help you get an estimate for how much you should be saving based on your expected retirement age, annual income and retirement expenses.
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