My daughter lives at home because rents are high in our area, but it’s hard to see so much of her paycheck go to accounts that haven’t or shouldn’t be touched for decades. .
For young people with big financial obligations like student loans, rent, and car loans, retirement investing may not seem like a viable option.
However, as my husband and I have repeatedly pointed out to our daughter, her pension is calculated based on her years of experience and final salary, so it may not be enough. And who knows what Social Security rules will be by the time she can get her benefits.
So we continue to urge her to start saving for retirement in her 20s. Here are five reasons why she should start now.
1. Saving for retirement may not hit your wallet as hard as you think.
Melody Evans, a wealth management adviser at TIAA, crunched some numbers.
Let’s say you’re in your 20s and earn $40,000 a year. You have decided to save 4.5%, or $1,800, per year for retirement. Your employer will provide an additional $1,800 to match your donation.
In total, you will invest $3,600.
10 without retirement tax benefits The tax rate on the first $11,000 is 12 percent The rest cost the Internal Revenue Service $4,580 annually. That would give you a take-home pay of $35,420, or $681.15 per week. (To keep things simple, Evans didn’t consider credits, deductions, or state taxes.)
However, the $1,800 is tax deferred, so the IRS will tax $38,200 instead of $40,000. So the IRS said he would receive $4,364, leaving him with $33,836, or $650.69 a week.
In other words, in Evans’ example, his salary would be reduced by about $30 each week as he started saving for retirement.
Historically, time is on the investor’s side. Let’s say in 2002 he started investing $3,600 a year in his S&P 500 as a 25-year-old and kept that amount for the next 20 years. By the end of 2022, the investment will be close to his $180,000.
“You can’t predict what will happen in the future. But over the last 20 years, the rate of return has been 8% annually,” Evans said.
2. The power of compound interest is tremendous.
Don’t waste time, your greatest financial asset.
If you start saving in your 20s, you have time to grow your money. You have time to enjoy the fruits of compounding interest. You have plenty of time to weather stock market volatility.
“It’s common for young people to wait for the right time to start saving, but that’s when they’re more established in their careers and have more space to save,” Evans said. “But consider automatically deducting money from your paycheck and putting it toward retirement savings, just as you automatically deduct money from your utility bills and cable bills.”
Waiting to save what’s left, she warns, may never get started.
3. Heal your injuries now.
The longer it takes to save, the harder it can be to form the habit.
Even if you can’t save a lot, save what you can.
It’s like exercising. Intense training can cause muscle soreness at first. But over time, your body will get used to the exercise. But every time you stop, you have to get used to exercising again.
The same goes for retirement savings.may It hurts now, but the more you do it, the more routine it will become.
There is also an element of happiness. “Young people who save are more likely to feel that the way they manage their money secures their financial future, makes them enjoy life, and helps them cope with unexpected expenses.” study By AgingWell Hub and TIAA Institute at Georgetown University.
4. Inflation is one of the biggest risks in retirement.
reached inflation In June 2022, it will reach 9.1%, the highest level in 40 years.
Inflation should worry you. That’s the number one reason to save for retirement.
If you live on a fixed income, rising consumer prices can significantly reduce your purchasing power.
5. Social security changes are coming.
Young people I meet say they don’t believe Social Security will exist by the time they need it.
The Old Age and Survivor Insurance Trust Fund, which pays retirement and survivor benefits, will no longer be able to issue full benefits from 2033, according to the latest report. trustee report for social security and Medicare trust fund.
Social Security is severely underfunded, and there is no doubt that it will continue to be so. Without it, millions of older people would fall below the poverty line.
But the fix could be financially painful for future generations.
Possible solutions are being discussed, such as raising the age at which people can receive their full retirement benefits. Social Security can start from the age of 62. However, benefits are reduced if you start receiving them before full retirement age (currently he is 67 if born in 1960 or later).
One idea to address this shortage is to raise the full retirement age to 70.
Congress is unlikely to repeal Social Security, but it’s important to start saving now for possible changes.
