Personal Finance

When You Start Saving for Retirement Matters

By Lawrence Sprung, CFP®

Many investors are curious when they should start saving for their retirement. Many people say you should begin saving as early as possible, which means as soon as you have an income.

Income does not necessarily mean a full-time job or when you start your career. You could be receiving income as early as you are able to get your working papers, which allow you to begin working certain jobs as young as age 14. Starting early instills great values in kids and exposes them to the need to plan for their future, the benefits of investing and the discipline needed to live within their means.

An Example Showing the Benefits of Saving for Retirement Early

There are two people, John and Jane. Jane begins saving at the age of 25, and John begins at the age of 35. Jane and John both contribute $5,500 per year until the age of 70, and they invest it in a way that will compound at an annual rate of 6%. By age 70, Jane’s account will be over $1,200,000, and John’s account will be just shy of $650,000.

This large difference is because of John’s later start. He was impacted by the fact that he did not contribute as much money and he lost the benefit of the extra 10 years of compounding.

Jane would have contributed $247,500 over the 45 years she invested, while John contributed $192,500 (a $55,000 difference). Starting earlier benefited Jane, and it benefits everyone else too. (This example does not account for fees, taxes or inflation. Receiving a 6% return every year is unlikely; it is more likely that you would have a different rate of return each year.)

Paying Yourself First

As your children or grandchildren begin to work, even on a part-time basis, be sure to have a conversation with them about “paying themselves first" as a way to start thinking about the future.

Setting up a Roth IRA can really benefit someone if they are young and in a lower tax bracket. For example, my 14-year-old son works for me during the summer months to earn some spending money. We discussed what he would be earning throughout the summer and devised a plan that would provide him with the spending money he wanted while also funding a Roth IRA.

Your financial position might be different now if you had started saving at the age of 14. Not only has this practice put my son in a good position for retirement, it has also taught him the value of saving and how to manage money. He even has the ability to monitor his account and see how his investments are performing. It's important that we get ourselves, our kids and grandkids ready for retirement, and this is the perfect first step.

(For more from this author, see: 5 Financial Habits You Should Start Early.)

Disclosure: This article represents the opinion of Mitlin Financial Inc. It should not be construed as providing investment, legal and/or tax advice.

This article was originally published on Investopedia.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.