When you’re in your 20s, retirement seems like a lifetime away. And even though that’s true, it’s never too early to start planning for retirement. The hardest part is getting started (what’s an IRA again?), but once you start planning for your financial future, you’ll likely feel more secure about it. Here’s why you should start now.
You May Have to Retire Early
Don’t assume you’ll be healthy as a horse well into your 70s — or that you’ll even have a job. Should you be forced to draw from Social Security early — even by just a few years — you will receive a reduced monthly rate for the rest of your life.
Inflation Happens
You’re going to need more money than you think when you retire — especially if you’re going to keep your large home, start new hobbies (golf is expensive), and vacation during your newfound free time. When living on a fixed income, inflation will rule your quality of living. Historically, inflation averages 3 percent, thus:
- If you need $35,000 a year to live now, you will need $47,037 a year in 10 years to support the same standard of living.
- $63,214 a year is the amount of money you would need in 20 years (age 85 if you retire at 65).
If we adjusted the inflation rate upward just 1 point to 4 percent, then the $63,214 required to support you at 85 becomes $76,689 – yikes.
The math is even scarier with a $60,000-a-year lifestyle. At a 3 percent inflation rate you would need:
- $80,635 a year in 10 years.
- $120,000 a year in 20 years.
- $163,914 in 34 years (If you retire at 65 and live to 99, you have lived 34 years in retirement.)
The good news is that Social Security and some pension programs adjust your income for inflation. The bad news is that if you are living in retirement by withdrawing from investments or savings, then the value of your money will dramatically decrease over time. Annuities, many of which offer an automatic cost-of-living provision, can help protect you from inflation.
Time Is on Your Side
If you’re in your 20s — and you get your act together now — you can achieve financial independence decades ahead of your peers who live from paycheck to paycheck, thanks to interest compounding. Consider this: a 22-year-old person who puts $4,000 a year into retirement accounts can have $1 million by age 62, assuming 8 percent average annual returns. Wait 10 years to start contributing, and you’d have to put in more than twice as much — $8,800 a year — to reach the same goal. The sooner you start saving, the more interest you can make in the time you have before retirement.
Starting Early Means Putting Less Away Now
If you procrastinate saving your money, you will have to start putting larger chunks of cash away than if you were to start earlier. This is important for at least three reasons:
- Because of inflation (and the cost of a larger house or a growing family), you’ll miss that money even more when you’re 30 than when you’re 20;
- While you could be making interest over the next decade if you start saving now, you’ll have to make up for that with cash out of your own pocket should you start 10 years from now. Ouch.
- The bigger chunks you’ll be putting away will mean you’ll have to live on less than you are now, while starting now means you have to put less money away from each paycheck.
The fact that you have decades before your retirement is not a reason to procrastinate saving; quite the opposite is true. Saving your money is what you have time for, so start now!
