When Should You Start Saving for Retirement?
A question I received on a regular basis as a stock broker was “When should you start saving for retirement?” We all have different ideas of what retirement will look like – ranging from those who want to retire early to those following a more traditional retirement model. Regardless of what approach you’ll take, saving for retirement is an incredibly important topic to consider. It goes without saying that due to this range, not to mention the particular specifics of each situation, retirement planning will look different for everyone.
This post springs from countless conversations I had with retail investors who were often struggling to make headway with their retirement planning. There were various reasons for this, but often times their challenges led back to a delay in saving for retirement. Added to that, there can be various issues related to investing for retirement – such as how to start investing in your 20s, investing while you have debt or if you waited until you’re older to invest. That being said, I believe the when should you start saving for retirement question has a relatively simple answer…
Start Saving for Retirement as soon as you Can
When should you start saving for retirement – now! This is ultimately the message many need to take to heart. I know life is often hectic, which makes it easy to fall into the mindset of thinking it’s ok to put off saving for retirement. Don’t get yourself caught in that trap! If your employer offers you a 401(k) plan, with a corresponding match it that is probably the best opportunity to start saving for retirement and why shouldn’t it be – it’s free money after all.
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I know there is an argument that if finances are tight that it’s good to bypass putting money into a 401(k) account. I would disagree with that on many levels, but ultimately falling back to not wanting to give up on the offer of free money for my retirement savings.
Unfortunately not all of us are offered a 401(k) plan or a match with our jobs, which can make saving for retirement, a little more difficult. If you’re in that situation, then generally the best option is to open a retirement account through an online brokerage. Many online brokerages, such as Etrade, allow you to start with no minimum balance. Simply put, anyone can do it.
Please don’t allow your lack of funds hold you back from saving for retirement. Even if you start out with something as small as $50 per month, start with that. Start putting that money in an IRA and allow time to do its thing and you’ll not only begin to develop a discipline of investing in the stock market, but you’ll also be actively involved in it. As someone who spoke with people on a regular basis who used this as a reason not to invest, please do not let that be you. In fact, the Center for Retirement Research shows that if you start investing at age 25 you have to put away one third of what those who start at 45 do for retirement. The moral of the story – start saving for retirement as soon as you can.
Retirement Planning is Just That…Planning
It can be difficult for many to start saving for retirement as it seems so far away. If you’re just out of college and investing that could mean as much as four or five decades – that is a lot of time. Whether you plan on pursuing the traditional retirement model, or something more entrepreneurial in nature, you’re best served by having an investment plan for your retirement savings.
That does not simply mean throwing your money into X number of the funds offered in your 401(k) plan, but taking active management of it and finding what works best for you. It means checking in on your investments on some sort of regular basis and making adjustments when necessary – essentially rebalancing your portfolio as the situation warrants.
And, if you currently hold student loan debt you need to take steps to pay off the debt on an accelerated timetable. Increasingly, older Americans are being held back from retirement by student loans for their children. If you currently hold PLUS loans from the Department of Education you should consider refinancing these loans with a private lender. All types of private and federal student loans can be refinanced in the private market. LendEDU put together this catalog of banks who allow parents and graduates to refinance student debt.
There is no set interval for rebalancing; just do whatever works best for you as long as you’re doing it on an annual basis in the least. It is also important to keep in mind that your plan and needs will change as your life changes and your risk tolerance changes.
I know this might seem overwhelming. If you stay on top of it, it won’t be. There are free tools to use that makes staying on top of your investments relatively simple. One such tool is Personal Capital. Personal Capital allows you to monitor all of your investment accounts, making sure you’re in the cheapest options available, as well as tracking them against their benchmarks all for free. Think of it as a free, on-going, portfolio review. If you’d rather someone else to handle all of this for you, robo-advisor options, such as Wealthfront, handle all of this for you so you don’t have to worry about it.
What do you Want to Pass on?
As you’re just starting out investing in the stock market, with an eye towards retirement, this can be one of the most difficult things to keep in mind. I have always encouraged investors to look at what they want to pass on as they plan out their investing.
Speaking personally, I want us to be able to pass money on to our children. I want us to be able to help start a legacy for them and their children. Thus, we have to invest accordingly. Of course, this impacts other things beyond investing, such as frugal living and the like, but investing in the stock market plays a major role in that.
Beyond wanting to be able to provide for family members or friends, you can also think of any charities/organizations you want to be able to give to in later years. Doing so opens up a number of different possibilities and taken with passing wealth on to family members can really make saving for retirement more tangible for many. Of course, you likely want to give to organizations you support in the present, though is something you’ll want to consider as you might want to be more purposeful in later years.
Saving for Retirement is a Marathon, Not a Sprint
If you’re struggling with when to start investing for retirement, please remember that time can be your greatest ally, but it can also be your worst enemy. Ultimately, so much of retirement planning comes down to time. While your retirement age may seem to be in the far off distance, you’ll do yourself no favors by putting off saving for retirement.
I think of it in this way, my wife is wanting to someday compete in a marathon. While I think she’s just a bit crazy to do that to herself, she can’t very well go out and run 26 miles at the drop of a hat. She needs to plan and prepare for weeks and months leading up to it so she can prepare her body to go through that stress.
Saving for retirement is very much like that as we don’t, generally, just wake up one day and have a fully funded retirement portfolio. It takes years of hard work and management to create a healthy retirement portfolio and bring it to the point that it’ll provide for those retirement years. With that in mind, please enter into your retirement planning with that mindset and you’ll be well served in the long run.
When did you start saving for retirement? Is there anything you wish that you would’ve done differently?
Additional resource: If you’re looking for somewhere to start saving for retirement with little money, you can open a Motif Investing account for as little as $250. I personally use Motif as they offer a great way to get started as well as allowing for instant diversification, not to mention promotions when you open a new account with them.