Why Retirement Planning Should Start Sooner
Saving for retirement is not a thought that crosses the mind of recent college graduates very often, or even those in their 30s. The excitement of earning a livable wage and enjoying all the perks of life that come with financial independence tend to distract younger workers from maintaining a long-term vision of their financial health. However, saving for your retirement is a marathon, not a sprint. It is crucial to start saving for retirement as soon as possible, so that you are more likely to achieve financial strength that lasts throughout your retirement.
Time Allows for Risk
Time is on your side! The sooner you start saving for retirement, the more time you give yourself to correct downturns, should the economy or certain industries experience struggles that eliminate your financial growth in the short term. For example, investing in ventures that are high risk often come with the benefit of a higher return. When you invest in these opportunities earlier in life, it gives you time to recover any lost funds.
When you wait until later in life to begin saving for retirement, you are forced to either adopt a conservative investment approach that can minimize your potential for growth or risk investing in volatile funds and heading into retirement with much less than you planned. Bankrate notes that while most 18 to 25 year olds invest 35% of their savings in bonds, ideally they should be investing 90% of their savings in stocks. Bonds have a historically conservative return rate, around 5.4%, while stocks have an average annual growth of 10.4%.
Take Advantage of Compound Interest
Compound interest is the greatest incentive to plan for retirement sooner. Simply put, compound interest is interest earned on the interest in your investments. Over time, compound interest helps your retirement war chest grow because it continuously reinvests earnings and increases returns exponentially.
For example, if a 25-year-old invests $2,000 annually for 10 years in a company 401(k) and then stops, with an average growth of 10%, the yield will be $556,197 by the time that individual is 65. If the same individual waits until they are 34 and invests the same amount annually for 30 years instead, they would only have $328,988 by the age of 65 because there was a full decade less of compound interest.
Spending Habits Improve
The earlier you start saving for retirement, the more likely you are to develop disciplined spending habits. This starts with focusing on a budget and cutting expenses when needed, the goal being: earn more money by saving money. The lessons you learn while saving in your youth can pay off in the long run. When you are further down the road in your career, you will have more capital to work with and be able to exercise restraint when needed to protect your financial health. The US Department of Labor lists good spending and saving habits as the #1 item on its list of Top 10 Ways to Prepare for Retirement.
Stay A Step Ahead of the Pack
The sooner you start preparing for retirement, the better off you will be down the line as retirement nears. This is not only helpful for retirement planning; investing early protects your finances against instability in your career. If your finances dip at some point, you will be better prepared because you started saving sooner. Last but not least, early investment also helps to reduce the chances of you making reckless choices in order to secure a stable retirement, such as investing in high-risk funds late in life.
As with any financial decision, you should meet with your financial advisor to discuss retirement planning strategies you can adopt now that will prepare you for retirement down the road. For more information, contact CalBay Investments.
The opinions expressed are those of the writer and do not necessarily represent the opinions of CalBay Investments