It's easy to feel like retirement is a long way away; it is. Personally, I'm looking at 40 years of waiting, at least. So why do we young people need to worry about it now?
If you want this to be your future, you better start planning now.
Say Person A starts saving $2,000 a year in a 401(k) or IRA account (more on what those are in a minute) when she is 25 years old. And say Person B starts saving $4,000 a year when she's 35 years old. If they both save the same amount each year until they are 65, who will have more money?
If you guessed B, well, think again. Not only will the person who started saving younger have more money, she will have more than twice as much; assuming 7% interest rate per year (the average rate on these types of accounts), Person A winds up with more than $419,000. Person B? Not quite $200,000. In fact, Person B will never catch up to Person A. Ever.
How does that work, you ask? The answer is about compound interest. I'll be the first to admit that math really isn't my thing, but compound interest is relatively simple. It just means that your interest is calculated both on the capital investment (what you are physically putting into the account) and on any interest you've already earned. What this means for us 20-somethings: It is imperative that we start saving for retirement now, if we want to retire at a decent age and have enough money to live off of.
I promised more info on 401(k) vs. IRA accounts. Unfortunately, I can't go into a lot of detail because I'm not terribly informed myself, but this is what I do know: a 401(k) is company-sponsored; some companies even match your contribution (it's like free money! that you can't touch for 40 years!) but in this economy, many companies are not matching contributions. That's okay. An IRA stands for Individual Retirement Account, which means you don't need your workplace to sponsor it. Anyone can open one. There are different types of IRAs, and more differences between them and 401(k)s (like how much money you can withdraw, when you can withdraw it and the penalties associated with early withdrawal), but honestly I don't know too much about all that. Sorry :(
So. Lesson for the day, I suppose. I had a 401(k) started when I began working for my current publication. When my pub got sold to a local media giant, my 401(k) got closed and converted to an IRA. I wanted to liquidate that fund and start my retirement savings fresh with my new 401(k) with my new company. After all, the IRA only has about $1,100 in it. I could certainly use that money to pay down some of my debt, or bulk up my savings account. Even after penalties and taxes, I would have gotten about $700. Seems like a good deal, right?
Before making a decision, I consulted my financial guru father. And you know something? He told me that money is only worth $1,100 now. But in 40 years, assuming an average 7% interest rate, that money will be worth more than $15,000. He added that it's common, with job changes and company buyouts and the like, for people to have more than one retirement savings account. Apparently, one of my aunts has five. That was enough to convince me to leave the money in my savings account, even if it means I have to work a little harder and longer to pay down my debt. How's that for a responsible fiscal decision?
So, in summary, you should be saving for retirement. Now. Since I'm no financial expert, go talk to the folks at your bank or a dedicated retirement savings company (I was using Principal before; can't remember the name of my new company) about opening an IRA, or talk to your workplace's HR person about the company's 401(k) options. Get informed, then get saving!
Have a financial topic you'd like me to discuss? Email me at verbal.melange at gmail dot com.
When I first got into the workforce I was told to invest in a 401k, so I did. Because the money was deducted from the very start I never noticed it gone, so that make it easier for me to be all about it. My old job was able to match what I contributed and when I moved to AZ and had to start another job I had to roll over my money. When I was mailed the check was surprised at home much I had saved! It was the best shock of my life. Since the new job, I definitely have invested more of my money so that future money can grow (and maybe retirement could come sooner rather than later). Great post!
ReplyDeleteAnother thing! If your company can/does match you get FREE MONEY. My employers matches like 25% up to 13% of my paycheck. Extra monies!
ReplyDeleteLucky you! My fingers are crossed that my company's new owner will match. They're a bit (okay, a lot) more financially secure than our former owners, haha.
ReplyDeleteSmart post. I just heard on the radio that, without assets for retirement, most people will have to work until they're 80 to have enough to retire comfortably. That's sad. Who wants to be working when they're in their 70s?!
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