If you are a young adult, planning for retirement, which is decades in your future, may be very low on your list of financial planning priorities. Here are 6 reasons why retirement planning should become a top priority now.
The sooner you start saving the more your money can grow. If you start investing even a small share of your income in a retirement plan when you are in your 20s, you may be surprised at the potential size of your retirement nest egg in your 60s. For example, let’s assume that you earn $40,000 annually at age 25, that your income will grow at a rate of 3% a year, that you will put 1% of your gross income in a retirement fund each year, and that you can earn 5% on the funds in your retirement account. Based on those assumptions, you would have more than $75,000 in your retirement fund at age 65. Putting away 1% of $40,000 could be relatively painless, since it amounts to just $400 or only $33 per month.
Make saving even more painless by setting up automatic withholding. If you have a share of your pay automatically withheld and deposited into your retirement account before you receive your paycheck, you will quickly stop noticing the missing funds, resulting in an even more painless retirement savings plan.
You may be able to turbo charge your retirement savings with employer matches. Check with your employer’s personnel department and find out if your firm will match any of your contributions to your retirement plan. Many do-often matching contributions up to a set percentage of pay. If possible, save at least as much as the company matches, which will double your annual contribution up to that level. Thus, in the example above, if you put 1% of you income in your retirement account and your employer matches that amount each year, instead of having more than $75,000 at age 65, you will have more than $150,000.
Your retirement plan contribution may be tax deductible, reducing its actual cost to you. For example, if you make a $100 tax-deductible contribution to your retirement plan and your marginal federal tax rate is 15%, the deduction will save you $15 in federal income taxes, reducing the cash cost of your contribution to $85.
For maximum reward, keep your hands off your retirement accounts. While retirement accounts can be a tempting target in the event of a financial emergency, make raiding your retirement account a last resort. Not only can dipping into your retirement funds torpedo your financial future, but it can be doubly costly, since early withdrawals from many retirement plans funded with tax deductible contributions will be hit with a penalty as well as a tax bill.
Count on yourself for financial independence in retirement. Perhaps the most compelling reason for you to begin saving for retirement as early as possible is that, given current trends, you may have to provide a large portion of your retirement income yourself. Increasingly, traditional pension plans are disappearing or, where they still exist, they are becoming less generous. Also, changes in the federal Social Security program could be ahead, possibly resulting in lower payments to future retirees.