Best Time to Start Saving for Retirement is Now

December 15, 2010

People often wonder what’s the best time to start saving for retirement. The answer is easy, though it’s sometimes not what people want to hear. If you haven’t done so already, the best time to start saving for retirement is today.

The specific investment strategy and asset allocation you utilize for your retirement portfolio may vary depending on your risk tolerance and other factors, but the indisputable truth is that the sooner you begin the better off you will be.

Unfortunately, the best time to start saving for retirement is when it seems like that’s the least important thing to do, or perhaps for some people the most inconvenient time to do so. Here is some advice to consider about why it’s best to start saving for retirement when you are young.

  • Saving early in life might seem difficult. For example, right after you graduate from college, or perhaps when you move away from your parents’ home and begin your first job, your finances will probably seem a little tight. You might not want to contribute any portion of your income toward retirement when you’re looking to start and enjoy your adult life by socializing or going out to eat with your friends, or by taking vacations when you are able to get time away from work.
  • Saving while you’re starting and supporting a family might seem unrealistic. When you’re getting married or starting a family, you might not feel that it’s a good time to save because you need to devote your funds to childcare costs, or buying a new home. As you start to advance in your career, you might not want to focus on retirement savings because you want to start enjoying your success by trading up to a nicer car and home. When your children start college, you might feel that it’s not a good time to save for retirement because of how much you may have to pay in tuition and fees over your children’s college careers.
  • Despite the apparent inconvenience, the best time to start saving for retirement is now. There’s always a reason to not save for retirement, particularly when you’re younger. But when you start saving earlier in your life, the figures of how much more money you’ll have by retirement are quite surprising. Assuming a 6.5% rate of return, a person who saves $5,000 per year from age 25 to 35 and then stops saving will have more saved money for retirement at age 65 than a person who saves $5,000 every year from age 35 to age 65. Think about that; a person who saves for 10 years will have more funds at retirement time than a person who saves for 30 years, simply by saving earlier in his or her life. This is true even though the total amounts contributed to the retirement account are much less ($50,000 for the “earlier” saver, and $150,000 for the “later” saver).
  • Saving less money earlier in life can often lead to a bigger nest egg than saving more money later in life. There are plenty of other scenarios where a person who begins saving earlier can contribute much less money, but still end up with more in retirement savings than a person who contributes more, but begins saving later in life. For example, assuming the same 6.5% annual rate of return, a 25 year old who only contributes $5,000 every other year until age 65 will have much more in total retirement savings than a person who contributes $5,000 every year from age 35 to 65. This is true even though the earlier saver only contributes about two-thirds of the total amount that the later saver does.
  • Unless you make saving for retirement a priority, there will never be a time that’s particularly easy to start. It might not be convenient to start your retirement savings today, but you’ll be glad you did.

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