You’ve heard it hundreds of times–start saving for retirement now. Ok, ok, we get it. But what exactly does it mean? Where do you start? How much money is enough to be saving?
It’s a lot easier to do something if you know why you’re doing it. There are tons of good reasons to start saving for retirement, but here are a few to get your wheels turning:
• Social security is not a sure thing. Unfortunately, many experts believe the generation entering the workforce will not be able to rely on Social Security as a viable source of income in our golden years, so we’re going to have to fend for ourselves.
• The value of compounding interest is huge. When you start saving for retirement, you’ll earn interest on the money you save–and eventually you’ll earn interest on the interest from the money you save. See the value here? You’re earning free money on free money, and the earlier you start, the longer your "interest on the interest" phrase will be (read: a much bigger account balance when it’s all said and done.)
• Once you get used to a higher income, it’s hard to readjust your budget to start saving. You’re already used to living like a college kid, so if you save the extra money you make from your first real-world job before you ever see it, you won’t know what you’re missing.
How does it actually work?
Alright, so we agree it looks good on paper to start saving for retirement, but how does it actually work? To get real-world answers, we went directly to the source–three individuals who are not certified financial planners, but who are in various stages of saving for retirement and have some “been there, done that” advice for your benefit.
When you’re first starting out on your own, there are a lot of expenses, and chances are your pay check isn’t huge. You’ll incur expenses getting yourself set up in an apartment, perhaps buying a car, and replacing your sweats with a wardrobe suitable for the working world. Besides the necessities, there are other fun things—like traveling—you’ll want to do while you still have a lot of freedom.
So how can you eat your cake and have it too? To find an answer, we turned to someone who has been successfully saving for retirement for 28 years—since his first job out of college. Tom Ryan, 50, of North Mankato, Minn., says the key to saving enough and having fun is paying cash for your expenses and not using credit cards and going into debt (link to CC debt sidebar). If you don’t pay off the credit cards each month, you’ll be stuck paying interest and end up paying more than you bargained for. That extra money could be used for your retirement instead of credit card payments.
"Try to make your money work for you instead of you working for your money," says Ryan. That means paying off debt, finding ways to pay for the things you need with cash (not paying interest on them), and saving leftover money where you’re earning interest (your money is working for you.) You can start saving for your retirement in your early twenties and still have fun–you just have to be smart.
Amy McCallister, 32, of Lakeville, Minn., graduated from college 10 years ago and now works in sales, but she recalls the challenges of saving for retirement in her early twenties. "I have never felt so broke as I did right after college," says McCallister. "I hate paying interest, so my goal was to get my debt paid off. After that was done, I started putting whatever I could into a retirement account, which was only about $600 a year, but it was something." If you take a hard look at your expenses, you can find room to put some money away, even if it’s just a little to start. With each raise she got, McCallister increased her retirement contributions. Now in her thirties, she and her husband have made saving for retirement a fixed expense in their budget and each contribute $500 a month to their retirement savings.
Incentives to save
The government also offers incentives to save for retirement. Some companies offer 401(k) plans (or 403(b) plans if you work for a nonprofit organization), which allow you to contribute money to an account before taxes are taken out, meaning your taxable income is lowered (and who doesn’t want to pay less taxes?) Every 401(k) or 403(b) plan works differently, but it’s common for plans to include mutual funds, stocks, and/or bonds so your money isn’t just idling in an account somewhere, rather it’s earning interest and growing. Many employers will also match your contributions up to a certain amount. Let me rephrase—your employer is giving you money to retire! Do everything you can to contribute at least the maximum amount your company will match–even if it means forgoing your morning latte.
A Roth IRA is also a great tool in addition to or instead of 401(k) or 403(b) plans. Contributions to Roth IRAs are after income tax, however your contributions will be tax-free when you collect from them during retirement. Greta Dohse, 23, of Chicago, Ill., graduated from DePaul University in June 2007, and made her first move to save for retirement in May 2008 by contributing to a Roth IRA.
"I put away the maximum yearly amount allowable by law," says Dohse. Her current job doesn’t offer a 401(k) plan, so Dohse took it upon herself to save up the $5,000 maximum contribution limit (for people 49 years old or younger) for 2008, and plans to do the same next year. To make her life easier, Dohse has her paycheck direct-deposited into two separate accounts–one for saving, and one for everyday expenses, so she’s not tempted to spend her retirement money on other expenses.
You’ve likely heard this saying before, but the first check you write at the end of the month should be to yourself–that means put money into savings first before you spend it or put into your checking account. Whether you have your paycheck split into separate accounts by direct deposit or if you do it yourself, it’s important to save money first, otherwise you risk not saving anything at all.
Seeing the payoffs
If you start saving for retirement in your early twenties, you’ll have a nest egg to work with by the time you reach your thirties. "It’s a positive reinforcer to see your nest egg growing and to know it’s working" says Ryan. Before you start–or even if you already have some money saved–you may want to talk to a financial expert to help you manage your money. A financial adviser at your credit union can help you settle on the best options for you.
"You’ve heard it before, but the best piece of advice I got about saving for retirement was from my dad, who heard it from his dad–‘A penny saved is a penny earned,’ " says Ryan. It’s a simple idea, but can reap big payoffs in the long run if you’re disciplined now.
So, start saving now, even if it’s a basic savings account. Look into what options your employer offers and talk to a financial advisor at your credit union to learn more about Roth IRA’s and other options. Do this now and you’ll be sitting pretty when it’s time to retire.
Copyright 2009, National Credit Union Association, Inc.