We all know that saving for retirement is a smart, reasonable thing to do. But here are some reasons why it’s crucial to start saving now, rather than waiting until you have more income, or feel you are in a better circumstance to start saving. Setting aside even a very small portion of your income each month can reap large benefits over time, providing the extra money you’ll need for a financially secure retirement.
First of all, if you’re not saving anything at all for retirement right now, get started today. Any amount you start saving today will make a difference. Next, educate yourself and make a plan for your specific goals. There are many good resources available to help you determine the best options for your unique financial circumstances, such as your employer’s benefits manager, an experienced accountant or tax professional, and educational opportunities like Lundervold Financial planning seminars.
Here are some of the biggest factors to take into account when making a retirement savings plan:
1. You Might Need More Money Than You Think
With the average life expectancy increasing, it’s not uncommon for retirement to last 30 plus years, and more and more people are outliving their savings. By setting aside more now, the better the chances that you’ll have enough funds for a long, enjoyable retirement down the road.
Another factor to consider is Social Security, which on average accounts for about 40% of income for retirees. Most people likely won’t be able to live on Social Security alone in retirement, so you’ll need to have additional saving options in place in order to make ends meet.
2. Retirement Accounts Can Reduce Taxes
There are many options when it comes to retirement savings accounts, but one key factor to consider is tax-deferment. One benefit of contributing to a retirement account such as a 401(k) or IRA account, is that your contributions are pre-tax and won’t count towards your taxable income total at the end of the year.
These types of tax-deferred accounts will allow you to defer, or even avoid taxes owed on your accrued earnings, which could end up in big savings down the road.
3. Compound Interest Is a Powerful Way To Save
Compound interest is one of the most effective ways to build your retirement savings over time. This type of interest is calculated from the initial interest added to the principal amount, plus the accumulated interest earned over time. In other words, compound interest is money earning money.
A retirement account with compound interest, such as a 401(k), can really boost your savings over time. For example, if you start investing $200 per month for 30 years, based on an 8% interest rate and an annual compound frequency, that initial $200 investment turns into $273,892 at the end of that 30-year period. This is compared to $72,200 if you saved the same amount with no interest.
It’s never too late to start saving for retirement, and every bit you save counts. The more you educate yourself on the best options for your situation and lifestyle, and have a clear and carefully laid-out plan, the more likely that you’ll have a successful outcome, saving as much as possible for a comfortable retirement.