You may think that you do not have to worry about your retirement planning until you are old, but the reality is very different. Realistically, as soon as you have started working you need to start saving money towards your retirement fund so that you can afford to retire. This may seem way too early, especially when you have other financial commitments. However, it is never too soon to start planning for retirement, and here are the reasons why.
Compound Interest
The most important reason to start saving for your retirement early is compound interest. This means that you will have a much bigger retirement fund if you start saving for it early. For example, if you start saving for your retirement at the age of 22 and save $100 per month for 40, you might expect to have $48,000 by the time you retire. This doesn’t sound bad, but you are forgetting that you will earn interest on your savings. If you assume that the average interest is 2% over 40 years (let’s keep the math simple) then by the end of year one you will have saved $1,224. (100 x 12 + 2%) The following year you will get your 2% interest on $1,224 as well as the $1,200 you have saved that year. This means that already your pension fund will be bigger. Now imagine all that interest adding up over 40 years. You would have built up a lot more money than if you had only invested over 10 years.
Monthly Payment
It is never too late to start investing in your pension fund. However, the later you leave it the more you will have to save per month to get the same amount of money. For example, say you want to make sure you have at least $50,000 in your retirement fund before you include interest. If you have 40 years to save up, you will have to save $104.17 per month. However, if you only have 10 years to save this will leave you trying to find £416.67 per month. This only makes up for your base fund rather than all the compound interest you would lose which means that leaving retirement planning until ten years before retirement will leave you having to find considerably more money.
Use a retirement budget calculator if you want a more exact example. Don’t worry if you are somewhere between graduation and retirement and have not started saving yet. Tally will help you to assess your existing finances and help you access a retirement budget calculator to make sure that you can afford to retire and enjoy the lifestyle you want.
Tax Planning
Let’s face it, nobody likes paying income tax, but it is a sad fact of life, right? That is unless you can find a way to put money away where the taxman can’t access it. Some retirement plans will let you save money in a retirement fund without paying tax on it which saves you a lot of money every year. It makes sense to put money into such a scheme as soon as you can so that you can save it for yourself rather than giving it to the taxman.
There Is Never a Right Time to Start Saving for Retirement
As depressing as it sounds, there will probably never be a time when you think you have enough surplus income to save for retirement. There will always be a more pressing financial commitment. When you graduate you will have a lot of student debts to pay off and you probably won’t earn a fantastic income to start with. Move up the career ladder and you might start planning to buy your first home or get married, and both things cost money. A little way further on you might decide to start a family. This will cost a lot and if you or your partner choose to stay at home or work part-time this will further reduce your available finances. Later still, you may decide that you want to buy a bigger home for your growing family or start a college fund. By the time you have done all this, it will be time to retire.
The way to combat this is to never see that extra $100 in the first place. If you save it as soon as you start earning it, you will get used to saving and you won’t miss the money as much as you would if you suddenly stopped earning it later. Therefore, it makes sense to start funding your retirement plan as soon as you have found work.
There are so many good reasons to start planning for retirement as soon as you can. Perhaps it is something you should consider sooner rather than later.