The cost of living may seem high and you may carry consumer debt, student loans, or a mortgage, but saving for retirement should still be included in your budget. Saving earlier can result in more money for retirement with the help of compound interest. Conversely, by delaying saving you’d miss out on tens of thousands of dollars. The question shouldn’t be, “can I afford to save for retirement?” It should be “can I afford not to?”
The Sooner the Better
Setting up a deduction, even a small percentage of your income to start with, to your retirement account now is better than waiting for the future to start saving for retirement. Time can work to your advantage with your investments as compound interest feeds your retirement fund. To take full advantage, invest your retirement account in a diversified portfolio. The market fluctuates from year to year, but generally, the value of your holdings will rise over long periods of time. So by investing sooner, rather than later, you can reap the benefit of that increase in value and compound interest.
“In personal finance, time is… the simplest and most reliable tool we have for building wealth.
…a few years could make a difference of tens of thousands of dollars, or more, thanks to compound interest.”
-Tanza Loudenback, Business Insider
Choose to Save, Not Spend
Forgoing buying that daily cup of coffee one day a week, calling your internet provider or car insurer to negotiate a better deal, or buying a used car instead of a new one; there are ways you can find money in your budget to put towards retirement. It may mean denying yourself some things now, large or small, to have the future you want at retirement. You may decide to settle for less expensive options of housing, transportation, entertainment, or travel. You might choose to forgo that concert, new restaurant, or gym membership. Ask yourself if that money is better saved so you can have a comfortable, secure retirement. Making a choice today with the future in mind will pay off in the long run.
Reduce Debt or Save for Retirement?
You may be prioritizing paying off debt over saving for retirement. However, long-term debt, such as a mortgage, shouldn’t dissuade you from saving for retirement now. Low-interest debt, such as student loans depending on your rate, shouldn’t either. Compare the debt’s interest rate to the retirement account’s rate of return. If the retirement account’s rate of return is higher than the debt’s interest rate, you should feel comfortable putting some money aside for retirement now. Paying off high-interest consumer debt, such as credit card debt, should be a priority, however, as the accumulating interest due would outstrip any earnings you’d get investing that money.
Tanza Loudenback, from the Business Insider, gave a great illistration. She wrote, “Consider the following example. Chris and Jennifer both invest $100 a month at a 5% annual compound rate of return. Chris begins investing at age 25, putting away $100 every month until 65 and Jennifer begins saving $100 a month at age 35.
An extra 10 years of saving means that Chris has about $162,000 in his bank account, while Jennifer has $89,000 by the time she is 65. Chris’ balance is nearly double Jennifer’s, and he contributed only $12,000 more of his own money.”–
In a Bankrate survey, adults most regret not saving for retirement early enough and not saving for emergency expenses. There’s no time like the present, start now or increase how much you are saving for retirement.