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For new professionals beginning a career in their early 20’s retirement can seem light years away. I certainly felt this way in my early 20’s, and to some extent still feel in my mid 30’s. The reality is retirement is not that far away. The longer millennials wait to start saving, the more difficult achieving retirement goals will be. For a long time the combination of Social Security and in most cases a pension ensured a semi comfortable retirement. Adding a 401k and/or IRA to the mix was just icing on the cake. For most job families pensions are a thing of the past, and social security is a big question mark. This leaves personal retirement savings as the most reliable way for millennials to achieve their retirement goals. So why is it so important to start early?
Building a savings habit
It’s easy to procrastinate when you first start your career. Common reasons for procrastination are, time, lack of disposable income, awaiting inheritance, etc. Although these feel like good reasons to wait I can ensure you they’re not. You’re in control of when and how you retire. Building a strong savings habit early is very important to building wealth. Starting a savings plan is often the hardest part, once established it becomes an addiction. Understanding money is tight when you first start your career, here are few tips to give you a kick start.
Time is Money
Have you ever heard of compounding? Compounding is the ability of an asset to generate earnings, which are then reinvested in order to generate their own earnings. In other words, compounding refers to generating earnings from previous earnings. Hypothetically speaking say you contribute $5000 to an IRA. In the first year your account balance grows by 10%. Your investment is now worth $5,500. In year 2, your account balance grows by another 10%. In this case your $5,500 account balance grows to $6,050. Rather than your investment growing $500 in the previous year, it grows $550. The additional $50 in growth is a direct effect of compounding. Each year growth takes place, compounding has a more dramatic effect than the year prior. Those that begins saving for retirement in their early 20’s have ten more years of compounding growth as compared to those starting in their early 30’s. In this case, time really is money!
Retire when you want, not when you can
The great thing about retirement planning is that you’re in the driver’s seat and in control. You control how much you contribute, the investment type, etc. Although fluctuations should be expected when investing, having the right plan will send you on the way to achieving your goals. At some point you may have been asked when you want to retire. Were you confidently able to answer this question? Most are not, nor should they be able to say definitively. However, having a plan in place with specific goals set will put you in the best position to answer this question.