Early in your career, you have a lot of financial goals competing for your attention. You might be saving up for a home or a car, paying off student debt, and planning to expand your family. Retirement might be on your goals list as well, but when you've got 30 to 40 years left in the workforce, it often winds up on the back burner.
But putting it off could make the task of saving for retirement much more difficult for you. Below, we'll look at why the first 10 years of your career are actually the most critical retirement savings years and what you can do if you're strapped for cash.
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Today's dollars are worth more than you know
Investing $200 or $300 per month for retirement might not seem like it would make or break your future, especially since that can't even cover your bills today. But a recent Goldman Sachs survey highlighted just how much these small contributions can grow over time.
It looked at the difference in retirement savings at 65 depending on when a person began saving. It assumed they earned a starting salary of $50,000 at age 25 and saw 2% annual salary growth. It also assumed this person invested 5% of their annual income and that their employer contributed a 5% match for a total of 10% of their salary saved annually and that this money earned a 6% average annual return.
A person who began saving for retirement at 25, according to this example, would have $1,081,333 by age 65, while someone who waited until 35 to start saving would have just $646,145. The early saver winds up with 67% more money, and 41% of their total retirement savings came from those first 10 years.
This isn't to say you can't retire a millionaire if you got a late start on savings. It's definitely possible, but you'll have to set aside a lot more per month. To reach $1 million by 65, you'd only need to save $525 per month starting at 25, assuming a 6% average annual return. But if you started saving at 35, you'd have to save $1,027 per month, which is a much taller order.
How to jump-start your retirement savings
One of the biggest reasons young workers don't save a lot for retirement is because they lack the funds to do so. They're saving for a bunch of other goals and their salaries are pretty low compared to what most will make later in their careers. But it's important to set aside money where you're able to do so, even if it's as little as $5 or $10 per month.
Falling into the trap of thinking you'll save more later on is dangerous because your later dollars won't have as much time to grow before you need to withdraw them. As a result, they're actually worth less than your dollars today. So whenever possible, start the habit of making regular contributions, however small, and work on building up from there.
Make sure you claim any 401(k) match you qualify to receive. This can reduce how much you have to set aside on your own. In the Goldman Sachs example above, the person only contributed 5% of their own funds because they got a 5% match. Obviously that won't be the case for everyone, but even smaller matches could amount to tens of thousands of dollars by retirement, especially if claimed consistently.
If you're on your own, start with what you can and see if you can increase your contributions by 1% of your salary per year. That's just $50 more per month for someone earning $60,000 annually. Try to boost your retirement savings rate whenever you get a raise as well, and consider banking year-end bonuses or tax refunds in an IRA.
Those who truly cannot spare any cash right now could try looking for ways to increase their income, like seeking out a better-paying job when possible or starting a side hustle. And if that's not feasible, it's OK. Just start saving as soon as you're able to do so.
Make sure you stay mindful of the contribution limits on all your retirement accounts so you don't incur unnecessary penalties. And remember, these limits tend to rise over time, so if you're not able to set aside as much as you'd like for retirement today, you may be able to make up for this in the future.
