When Is the Best Time to Start Saving for Retirement?

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Whether you're 25 or 55, you've probably given at least some thought to saving money for retirement. But according to a 2020 report from the Federal Reserve, one-fourth of American adults who aren't retired lack a single penny of retirement savings. The good news? It's never too late to begin setting aside money for retirement. The best time to start saving for retirement is now—before time gets away from you.

Why do you need to save for retirement? Any way you slice it, retirement is expensive. Depending on your goals, you might need enough stashed away to provide roughly 70% to 90% of your pre-retirement annual income in order to live comfortably once you stop working. In addition, you might wind up living longer than you thought you would, meaning you'll need even more money to cover basic necessities, including health care and housing.

Another reason to save for retirement: Your Social Security benefits might not be as robust as you hoped they'd be. Social Security benefits only replace about 40% of pre-retirement income, according to the National Institute on Retirement Security. As of July 2020, the average retired worker in the U.S. received just $18,189 in annual Social Security benefits, which comes out to about $1,515 per month. Furthermore, a 2020 report from the University of Pennsylvania warns that funding for Social Security could dry up by 2032. Depending on your age, that could result in no Social Security checks when you reach retirement age.

When Should I Start Saving and Investing for Retirement?

Your retirement party draws closer every day, so there's no reason to delay saving and investing for post-work life. Today, not tomorrow, is the best time to start putting away money for retirement. That's the case whether you're in your 20s or your 50s.

It's simple: If you start saving for retirement earlier in life using an IRA (individual retirement account) or 401(k), your money has more time to grow. Let's look at what could happen if you contribute to a tax-deferred retirement account beginning at age 25 versus age 35:

Starting at age 25…

At age 25, you begin depositing $3,600 each year into a tax-deferred retirement account ($300 a month). You plan to retire at the age of 67, the age at which you can collect full Social Security benefits. If you keep making the same annual contribution until retirement, you will have made a total contribution of $151,200. Presuming an annual return rate of 7%, your contributions will balloon to $913,111.

Starting at age 35...

If you wait until age 35 to start setting aside money for retirement and make the same contributions as the previous example, you'll have contributed almost as much by the time you retire, but your earnings will suffer significantly. Over 32 years, you'll deposit $115,200, but have an estimated $428,523 in your account by the time you reach retirement age.

In this case, putting off retirement savings until 35 leaves you about half a million dollars short of where you'd be if you began saving at 25.

Calculate How Much You'll Need to Save for Retirement

Now, in order to put yourself on the right financial path for retirement, it helps to figure out how much money you'll need when you reach that point. To calculate that amount, you should consider what you want your retirement lifestyle to look like and when you want to retire. Then, you can do a little math to determine how much you'll need to save for retirement.

Typically, investment experts suggest saving at least 15% of your gross income for retirement. But deciding on your desired retirement lifestyle and timeline will dictate whether that percentage is right for you.

Take into account living expenses, health care expenses, debt obligations and other costs to arrive at an amount you anticipate needing in today's dollars to handle those expenses without straining your finances. Once you've got that picture in mind, use a retirement calculator like those from investment firms such as Vanguard, Fidelity, Charles Schwab and T. Rowe Price to plug in projections regarding income, expenses and investments to come up with an estimate.

Where Should I Put My Retirement Savings?

Tax-favored retirement accounts like 401(k)s and IRAs are good places to start when you're seeking places to put your retirement savings. Employers sponsor 401(k) plans and may even match your contributions up to a certain percentage of your income. IRAs are retirement accounts you open on your own.

Retirement accounts rely on investments to grow your contributions over time. They may use various strategies to do so based on the retirement fund manager's judgment and your own comfort level when it comes to risk. Investing involves buying an asset or several that you believe will grow in value over time, which usually means purchasing securities like stocks, bonds and mutual funds. Other kinds of investments include real estate and gold.

If you're uncertain about how to approach investing, you might seek advice from a financial advisor. But if you're more comfortable with investing, you might open an online brokerage account on your own or rely on a robo-advisor investing app, such as Betterment.

Before making any investment decisions, though, you should look at your financial situation. Do you have enough money to cover everyday expenses? Do you have an emergency fund? How much debt do you have? After you answer those questions, decide how much of your money you can spare to allocate toward your retirement fund.

You also should scrutinize the current condition of the investment markets and weigh your tolerance for financial risk. Among the risks: The value of your investment portfolio can fluctuate over time, based in part on how stocks, bonds and mutual funds are performing. Many retirement strategies will allow you to adjust your risk level. Making low-risk investments may provide some peace of mind that you're less likely to lose money—but you may miss out on the bigger payoff more risky investments can provide.

Tips for Spending Less Money and Saving for Retirement

If you've realized it's time to save money for retirement, you might examine your spending habits to accumulate more cash for your golden years. Here are three ways you can spend less and save more:

  1. Decrease your credit card debt. One simple strategy: Pay your credit card bills in full every month so you can steer clear of interest charges. High credit card debts can result in big interest charges that leave you less wiggle room for retirement contributions. If that's not possible, work to pay down your credit card debt as quickly as possible. A credit card payoff calculator can help you understand how long it may take you to pay off your debt and how you might be able to shorten that period.
  2. Consolidate your credit card debt. Shifting some of your higher-interest credit card debt to a lower-interest debt consolidation loan might leave you with additional cash to put aside for retirement.
  3. Think twice about big purchases. Do you really need a new car? Can you do without a new dining room table? Look at whether you can get by with what you've got now or explore lower-cost alternatives, such as a used car or a used dining room table. The money you save could go into your retirement account.

The Bottom Line

Retirement might be far into the future, but preparing for that future should start today (if you're not already saving for retirement, that is). To get ready for the time when your work days transform into relaxing days, reflect on what you want to accomplish in retirement, what kind of lifestyle you plan to embrace, what your current financial situation is and what your investment strategy should be. Your future self will thank your current self for investing the time and energy required to build a healthy nest egg and a comfy retirement nest.