When should you begin saving for retirement? What is the magic age? It would be easy to say...start saving for your retirement as early as possible. We all know that few people get rich through their wages alone. It's actually the miracle of compound interest (earning interest on your interest over many years) that builds wealth. The youngest workers are in the best position to save for retirement, because literally, time is on their side.
If you have a teen that starts working (yes, even in their teens), I would recommend a small amount be placed in an IRA or other long term venue for retirement. As little as $20/month can make a huge difference for their long term success. $100/month would be even better. The time value of money is incredible when you start as young as possible. Even if they can only contribute for a year or two before either heading off to college or their vocational studies, it will continue to grow. Each year's gains can generate their own gains the next year - a powerful wealth-building phenomenon known as compounding.
Let's look at an example of two people. One who started early and never contributed again and one that waited to contribute.
Person ONE starts at age 25, and puts aside $3,000 ($250/month) a year in a tax-deferred retirement account for 10 years. They stop saving completely after that point. By the time person one reaches 65, the $30,000 investment will have grown to more than $338,000, (assuming a 7% annual return), even though they didn't contribute a dime beyond age 35. Person TWO puts off saving until age 35, and then saves $3,000 a year for 30 years. By the time they reach 65, they will have set aside $90,000 of their own money, but it will grow to only about $303,000, assuming the same 7% annual return. That's a huge difference.
Person one contributes only $30,000 of personal funds with a growth of $308,000 in interest. In contrary, person two contributes a total of $90,000 of personal funds with a growth of only $213,000.
It's also good to point out that if you were remiss on starting early, you are not doomed. The best time to start may have been in your 20's or earlier, but the second best time is now.
In 2022, the maximum amount that can be saved in your 401K (company sponsored retirement plan) is $20,500. If you’re over 50, it caps out at $27,000. If you don’t have a company sponsored retirement plan or want to set aside additional money, the maximum contribution for a Roth or standard IRA (Individual Retirement Account) is $6,000 and for those over age 50, $7,000. If you are self-employed, you would instead have an option to get a SEP (Simplified Employee Pension). The 2022 amounts are 25% of the employee’s salary or a max of $61,000. Important to note that 401 is pre-tax dollars; that means even more savings for you. For a 403B, it is $20,500 for 2022 and $27,000 for those 50 or older. #Finhacks #RetirementSavings #retirement #retirementplanning #whentostartsaving
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