You probably already know that starting to focus on your retirement savings plan in earnest when you’re 45 or 50 years old means that you’ll likely have a difficult time being able to retire with a high standard of living when you’re 60 or 65. So it’s therefore clearly possible to start saving too late in order to meet certain goals. But what about the opposite consideration – how early it is too early to start saving for retirement?
In short, the answer to the question is an easy one; it’s never too early to start saving for retirement.
Here is some retirement advice for you to consider when to start saving for retirement.
The Value of Time. You may be familiar with calculations such as the following, but it’s always worth reminding ourselves of the value of time. Consider two individuals; one who saves $5,500 every year for 10 years beginning at age 20 (but then makes no additional contributions after that), and another who saves $5,500 every year for 35 years beginning at age 30. Assuming a 7% rate of return, the value of the first individual’s account will be $50,000 greater than the second person’s, despite the fact that the second person contributed almost 4 times as much money to their account. Timing is very important, and the earlier you start saving the better.
Earned Income Requirement. Ideally, it would be great to start an IRA for your child as soon as they were born. Unfortunately, the IRS regulations on IRAs do not allow this. In order to set up or contribute to an individual retirement account, the account holder must have earned income in an amount at least as much and as their contribution. However, this does mean that as soon as your child gets their first job and earns money, they can contribute to an IRA in that tax year. Furthermore, if you own your own business you may be able to hire your child and encourage them to use their earnings to start their own IRA.
Appropriate Saving Levels. In some respects, saying that it’s never too early to start saving for retirement is a bit of an oversimplification because that concept doesn’t address what an appropriate savings level would be. The answer will vary for each individual, but you should try to maximize your retirement savings each year consistent with your other financial goals.
Other Financial Priorities. At every stage in your life you will have different things competing for your finances, and saving for retirement is certainly one of them. But that doesn’t mean that everything else should suffer just so that you can put every single dollar you make towards retirement. For example, if you’re relatively stable in your personal and professional life, it could make significant financial sense for you to buy your own home or condominium, and prioritize saving for a down payment over maximizing your retirement savings.
If you can only afford to contribute $500 to your retirement savings this year, then be sure to do so. You’ll maximize the chances of reaching your retirement goals by saving whatever you can as soon as possible.
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You probably already know that starting to focus on your retirement savings plan in earnest when you’re 45 or 50 years old means that you’ll likely have a difficult time being able to retire with a high standard of living when you’re 60 or 65. So it’s therefore clearly possible to start saving too late in order to meet certain goals. But what about the opposite consideration – how early it is too early to start saving for retirement?
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