One of the most challenging goals to meet financially is to get started on saving for retirement. For young and middle-aged workers, retirement can seem like a distant time that you don’t need to think about it yet. Unfortunately, this is also a time when you have other competing financial priorities, like saving for a down payment on a house, paying off debt, saving for future expenses like college tuition, and so on.
It is incredibly important to start saving money for retirement early and often because the compound interest gains depend on getting the ball rolling as early as you can. Some different tools and benefits can help you save for retirement, and knowing how they work can help you get started.
Employer Matching Programs
The first thing to learn is whether your job offers any kind of matching program for retirement savings. Most employers will provide this for full-time employees. It will be described in terms of a percentage match– if you contribute a percentage of your salary to retirement, your employer will match that contribution and add more money up to a certain amount.
So, for example, if the match is 4 percent, then if you contribute 4 percent of your salary to the official retirement account, then your employer adds another 4 percent of free money to the same account. That adds up to a lot, so a good goal is to save enough to max out the contribution from your employer, whatever it is.
Tax Benefits of Retirement Plans
Aside from the employer match, there is another good reason to take advantage of the retirement plan at work: the tax benefits. The government designates retirement plans to have a lower tax burden than regular savings and investments. Typically investments are taxed twice– first as income when you get the money as a salary, and then by capital gains when you go on to sell the investment later.
Retirement accounts let you avoid one of the two sources of taxes, depending on whether they are a traditional or Roth account. A traditional account is exempt from the income taxes, and Roth accounts are exempt from the taxes at the end when you withdraw the money. Either way, you save a lot on taxes.
Factor in Social Security
You also need to consider the role of programs like Social Security. Social Security is supposed to replace a portion of your income when you retire. You automatically become eligible for Social Security by paying taxes over the course of your career, and you can start to claim the benefits as you approach retirement age. You can get a more extensive set of payments if you wait to begin collecting until you are older. Social Security payments continue for the rest of your life.
However, Social Security is starting to run low on money. There aren’t enough taxes to pay for everyone’s benefits unless there are changes. So while you can calculate what kind of Social Security benefits you might get under current conditions, that may change depending on how Congress addresses the shortfall in the coming years.
The Power of Saving for Retirement Early
The reason that saving for retirement early on so is so important is that saving means investing in assets, such as stocks. You buy into those assets in your retirement accounts. They should rise in value over time, increasing the value of your savings. This increase will grow according to compound growth. Every year, they increase in value more, so over the course of decades, the account will grow to be much more valuable than the dollars that you contributed to it.
You can calculate what your gains will be in the future by using a compound interest calculator. This lets you plug in how much money you initially have in your retirement savings, how much you plan to contribute each month, and what kind of return you expect to get on your investment. Then you can see what the value of the savings will be at any point in the future based on those parameters.
This calculation will depend on you following through and successfully making your payments to the account each time. Once you see just how much the power of compound interest can add to the retirement savings you put away, it will become clear that starting early provides you with a considerable advantage. Even if you start small, those payments add up once compound growth starts to kick in and the value of your investments grows over the course of the decades in which you will save the money.