The median monthly Social Security benefit is $1,827, which likely is far from your current monthly income.
Because of the high probability that Social Security benefits won’t be sufficient to pay your living expenses in retirement, you must put money aside for your golden years. And it’s best to begin contributing to a 401(k) or individual retirement account as soon as possible. This highlights the importance of starting a savings plan in your twenties.
You might wonder, “Do I need to start saving that early?” The short answer is no. Yet there’s one primary reason why you might want to.
It would help if you stayed within retirement goals.
It’s common for people in their twenties to focus on paying down debt and saving for an unexpected event. That’s why it’s understandable if putting money into a retirement plan is daunting.
But, if you give yourself enough time, saving for retirement can become surprisingly simple. You may be dissatisfied with your retirement savings if you give yourself a longer time frame for saving and investing.
Let’s pretend for a moment that you’re in a position to set aside $200 monthly for retirement. Assume further that you find an investment strategy that yields an annual rate of return of 8%. This rate of return is fair for a longer savings horizon because it is only a few percentage points lower than the stock market’s average return as measured by the S&P 500 index.
Let’s say you start putting away that $200 monthly in your twenties, giving you 40 years to save that money. That will ultimately provide you with a nest egg of about $622,000. You have to admit, that’s incredible.
Nevertheless, if you wait until you’re in your 30s to start saving, you’ll be surprised at what happens. Putting aside money for retirement over a shorter time frame (say, 30 years instead of 40) will net you around $272,000.
That is not a small sum of money by any imagination. Which money, less than $300,000 or more than $600,000, would you want to have in retirement? The correct response is probably self-evident. That’s why starting your retirement savings in your twenties is so essential. Adding a few more years of contributions and investment earnings might make a substantial difference.
A helpful method to establish the routine of saving for retirement:
It can be difficult to consistently set aside money for a retirement plan if you haven’t done it before. Put the procedure on autopilot if you genuinely care about your results.
Contributions to a 401(k) plan are effectively automated because they are automatically removed from your paychecks. There may be better options than a monthly transfer or check to your IRA, although many individuals do it. You can set up an automated transfer from your checking account to your IRA at the beginning of each month before you have an opportunity to spend the money.
Only some people begin retirement planning in their twenties. Yet if you get a head start, you will likely be grateful to yourself for it afterward.