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The Case For Starting Your Retirement Saving Earlier

by Jeremy Holcombe

As you move through life, retirement often seems a long way off.  And when you’re young, saving for it is simply not on your radar.  But all of a sudden, there it is right in front of you – and it’s too late for a do-over.

It’s only natural to put off saving for retirement.  Your youth is filled with hopes and dreams – vacations, fun, new cars, and new clothes.  Then you get busy raising a family and your paycheck goes to caring for the kids, getting a dog, or buying your first home.  Retirement can wait.  But don’t let it.

Start young.  You can’t go back in time, but what you can do is to start saving sooner.  The earlier the better.  If you start saving when you’re young, your money will not only increase with each deposit, it will earn interest on that higher balance.  So if you start saving for retirement when you’re 20, for instance, a $200 monthly deposit could result in as much as $500,000 at a 6 percent interest rate by the time you’re 65.  If you don’t start saving until you’re 50, that $200 deposit at the same interest rate will earn you just $60,000 at 65.

Make saving a habit. Even if you don’t have a lot of extra cash to set aside, you probably have a little – especially if you set it aside before you even think about spending it.  Obviously the more you can save, the better.  But even $10 or $20 per paycheck will add up.  And that’s a small enough amount that you won’t even miss it.

Save first.  We all have bills and expenses, but don’t put saving at the bottom of your list.  If you save first – by putting that money in a designated savings account, you’ll never miss it.  But as it grows, you’ll definitely see the benefits when retirement is near.

Contribute to a 401(k).  If you work for a company that offers employees a 401(k) retirement savings plan, take advantage of it.  Your chosen contribution will be deposited to the account “pretax” – meaning your current income will be taxed on the amount you earn minus that amount.  And most employees match at least a portion of your contribution, which makes it add up even faster.

Open an IRA.  If you own your own business or just want another avenue for saving, consider setting up an Individual Retirement Account or IRA.  In a traditional IRA, your deposits ($5,000 maximum) will be tax-deferred if your employer doesn’t offer a retirement plan.  If they do, you may face some taxes on your IRA if you choose to forego their plan in favor of an IRA.  But in most cases, you won’t pay taxes on these funds until you withdraw it – and chances are, your tax bracket will be lower in your retirement years than it is while you’re working full-time.

Or open a Roth IRA.  The difference is basically related to the tax break you’ll get.  In a Roth IRA, you won’t get an upfront tax break now – but you won’t need to pay taxes when you do withdraw the money at retirement.

Whatever method you choose, make the choice to save.  It may be tempting to cheat in the beginning, but in the short time that it takes for saving to become a habit, you’ll be able to see significant growth in your account.  And that’s a benefit you’ll reap for many years to come.

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