Importance of saving for retirement early
People are living longer, meaning many individuals will spend decades in retirement. Financing those years will require a great deal of money. Relying on Social Security will not be enough. Social Security wasn’t designed to be anyone’s sole income in retirement. According to the Social Security Administration, its payments replace about 40% of the average wage earner’s income after retiring. And, it adds, “most financial advisors say retirees will need about 70% to 80% of their work income to live comfortably in retirement.” Therefore, the sooner an individual starts saving for retirement the better. Time is a big advantage for investing. An investor who starts early and invests constantly has the potential to accumulate more assets. Additionally, investing with a longer time horizon allows an investor an opportunity to withstand volatile markets and stay invested, realizing the benefits of compound interest.
The advantages of doing so
Employer-sponsored retirement plans often offer valuable benefits to investors. These benefits include tax-deferred contributions, diverse investment options and the potential for matching contributions from the employer. All of which can help an investor move towards their retirement goal. One of the key advantages is the power of compound interest, which is the ability of your assets to generate earnings, which are reinvested to generate their own earnings.
This hypothetical illustration assumes an annual 4% return after inflation. Figures are in today’s dollars. The illustration doesn’t represent any particular investment.
Tips for making it work
- Start as early as you can. A long-time horizon can have a great impact on investment results
- Contribute to your company’s retirement plan up to the maximum 401(k) match (if offered). It’s like getting extra money from your employer. Make it your first goal to contribute at least enough money to get all the matching funds your company offers. If you can’t contribute enough to get the whole match, start increasing your contribution by an additional 1% of your salary each year.
- Utilize automatic escalation. Automatic escalation is a 401(k) plan feature that automatically increases an employee’s contribution amount. For instance, you can set the feature to increase employee contributions by 1% each year up to 10% or more. If your retirement plan does not have an automatic escalation feature, you will still be able to increase your contributions manually.
- Try to avoid pulling money out of your 401(k) until retirement. Withdrawing money can greatly impact your retirement nest egg and you can potentially be penalized for doing so.
“10 Tips to Help You Boost Your Retirement Savings – Whatever Your Age” Merrill, 2019.
“Benefits of Starting Early” Capital Group, 2019.
“When Should You Start Saving for Retirement?” Vanguard, 2019.
“Top 4 Reasons to Save for Retirement Now” Investopedia, Aug. 2019.
“Why Your 401(k) Needs Automatic Escalation” Principal, 2017.
“8 Saving Fundamentals” Charles Schwab, 2016.
“The What, Why and How of Investing for Retirement” PIMCO, 2019.
This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.
The hypothetical rates of return used do not reflect the deduction of fees and charges inherent to investing.
Investing involves risk including loss of principal. No strategy assures success or protects against loss.
Contributions to a traditional 401(k) may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax.
Contact your plan sponsor if you would like more details regarding applicable provisions of your specific retirement plan.