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Why Planning Early for Retirement is More Important Than You Think

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“Save early, save often” is one of the most important retirement lessons, even more so for millennials. With crushing student loan debt, increasing living costs and stagnant salaries, many millennials are living paycheck to paycheck and barely being able to save at all.

Additionally, data collected by Charles Schwab reveals that millennials who are able to put money aside are saving more for short-term life experiences instead of making more long-term investments like buying a home or investing in the market. Another 2018 survey on 1,000 millennials by LendEdu shows that about half of them spent more on eating out than saving for retirement.

Retirement is an especially important area that younger generations tend to overlook, but it’s a reality that we all face as we get older. Planning early and saving amply for one’s retirement is like borrowing money from one’s younger self. So, the earlier one starts to save for retirement, the lesser their premium burden is.

Let’s Talk Numbers

Let us consider two individuals — one with 10 years until retirement and the other with 30. Assuming that both maintain the same standard of living, an amount of $5,000,000 is required to sustain the post-retirement period.

Excluding any interest or inflation rates to make understanding simpler, the older person will have to save $500,000 a year, or about $41,667 a month from now for 10 years. On the other hand, the younger individual will have to save only about $13,889 a month to reach that retirement goal.

The Power of Compounding: Better Early Than Late

Simply put, compounding is generating earnings from previous earnings. Retirement savings invested appropriately for a longer period of time will give you a bigger return by the time you retire compared to savings invested for a short period of time.

Interest then gets added to the principle amount at the end of the twelfth month. Then, this increased amount of principle gets reinvested to earn a higher amount of interest, even at the same rate of interest. So, if more years are added to the savings plan, the returns at the end of the term are also higher.

Compound interest is possibly the best incentive to save for retirement. As Albert Einstein famously said, “Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it.”

How Can Beginners Save?

To encourage millennials and young adults to save, initiatives like the American Savings Promotion Act, under which banks reward those who saved the most money, have been undertaken by the government. Saving for retirement, however, requires specific plans in which you can invest for a better future. Here are a couple of options that you can consider to plan your retirement savings:

A 401(k) is an employer-sponsored fund in which you can contribute a certain percentage of your pre-tax salary. In some cases, the employer will pitch in a certain percentage of the amount you put in, called 401(k) match.

You can also choose to put your money into an Individual Retirement Account (IRA), which is a plan that enables you to save for retirement in a tax-advantaged way. A traditional IRA accepts pre-tax contributions, whereas Roth IRAs do not provide tax deductions on contributions. That is, a Roth IRA takes after-tax contributions only, and savings and investments grow tax-free without any restriction on withdrawals. In traditional IRA plans, income tax is not imposed on the yearly contribution, up to the annual maximum, and post maturity, all withdrawals are taxed as ordinary income.

Those who have access to these retirement benefits tend to save more than expected. A recent analysis by the Transamerica Center for Retirement Studies shows that millennials who invested in 401(k)s, IRAs, and other kids of retirement funds put aside 10% of their salary on average.

There are very few things that a millennial cannot do, and there are very few things that the Internet cannot provide. However, if you’re unable to access one of these plans through your employer or workplace — according to Pew Charitable Trusts research, over 67% of millennials do not— there are websites and other online options available that offer secure plans.

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