When we’re in our twenties or even our forties, retirement can seem so far away as to be almost unreal, as though it’s something that will happen to someone else, in some other life. As we progress through our working years, we develop routines centered on our jobs, our families, and our paychecks. It’s easy to live in the illusion that this routine will continue forever; it’s easy to put off thinking about what might come after.
Realistically, at what age should you start retirement planning and saving? The short answer is, as soon as you start working and drawing a regular paycheck. The age of twenty-one is not too early. There are several good reasons for this.
First, the longer you save, the less you’ll have to put away each month and the more time your savings will have to grow. It only makes sense. There are various calculators online that enable you to calculate the power of compound interest — whereby the interest and dividends earned by your retirement savings each year are invested back into your savings account, compounding year after year. Starting your savings program just six or eight years earlier — and putting away just a few thousand dollars a year in your early years — can result in a significantly bigger nest egg when you’re in your sixties. Of course, it’s never too late to start saving. But if you start from scratch at age forty-five, you’ll have to put away that much more each year to catch up.
Second, if you get started early, you’ll develop the habit of saving from an early age. Money set aside for your retirement savings will seem like just another bill that has to get paid — you’ll account for it month after month, prioritizing just as you do for your car payments and electric bills. If you have a rough patch in terms of household finances, you’ll automatically cut back in other areas before you hold off contributing to your retirement account. Financing your retirement is not “discretionary spending”; it’s as critical to your future as your mortgage payments, or money that you put aside to pay for your children’s education.
And third, saving money is easy. You can put your savings on autopilot and not have to think about it again. If you work for a company, your company most likely offers a retirement plan, commonly a 401(k). It’s probably up to you to set up your 401(k); once you do that, contributions are deducted automatically from your paycheck. Contribute as much as you can each month — up to the legal limit — particularly if your firm offers matching contributions. Because studies have shown that many employees still tend to put off opening a 401(k), many companies have gone one step further, offering “automatic enrollment” to all new employees. Your account is already set up for you; you don’t have to do a thing. If for some reason you choose to stop contributing, you’ll have to take action to do so.
Because 401(k) accounts, as well as Individual Retirement Accounts (IRAs) and certain other retirement savings vehicles, are tax advantaged — offering tax deductions on contributions and tax-free growth (and, in the case of Roth IRAs, tax-free withdrawals), the federal government limits annual contributions. However, if you’re over the age of fifty, these limits are raised — allowing so-called “catch-up contributions,” geared toward procrastinating savers who have some catching up to do. Hopefully that won’t apply to you — and that, by the time you’re fifty, you’ll be well on your way to retirement security.