A letter for those who say: “I’m too young to be saving for retirement”

by Kayleigh Yerdon, Cornell University Dear Young Money-Saver,

Let’s cut to the chase really quick: you may be young, but you are absolutely NOT too young to start saving for retirement. You might be 18 years old and working a minimum wage job or maybe you’re 30 and just see retirement as way too far off. You have so much time before you get to retirement that you might as well just think about it later, right? Wrong. Whatever your situation, you should start saving for retirement right now.

We can be realistic. You might be saving up for your first house or your first car. You might be paying monthly rent or feel that you just simply don’t have enough money in your paychecks to put any aside for retirement. These are normal feelings and they probably won’t go away any time soon – you’re just starting out. However, that doesn’t mean that you can’t start to save. In fact, the more time you spend thinking about how you “have to save absolutely all of your money up for your *insert (car / house / rent / vacation / etc.) here*,” the more time you’ll end up waiting on saving for retirement. Trust me, you won’t want to be the person who wakes up at age 50 with no retirement savings, even if you finally have your nice house/car/etc.

So, you’ll need to start somewhere. Where can the money come from? If you have a 401(k) plan – a plan that lets workers save and invest a portion of their paychecks before taxes are taken out – you may be a little confused about how it works. (Check in with the Weekly Drive next week for a full explanation of 401(k) plans!) But, if your employer doesn’t offer a 401(k) plan, you’re going to have to turn elsewhere to make sure you’re still saving enough money to retire comfortably.

Your first question should be, how much is enough money to “retire comfortably?” This might be the hardest question you come across – there really is no easy answer. However, the rule of thumb from many experts is the 4% Rule. This is the idea that you should be able to withdraw four percent of your account in the first year of use and then four percent (adjusted for inflation) each consecutive year.

With that in mind, you might consider starting a separate savings account or an IRA account. By creating a separate savings account, you might be able to will yourself into not touching your saved assets until later. When you open a savings account, you are taxed on interest, but not on any withdrawals you make from your account. If you’d rather invest your money and see it potentially grow, you might consider an IRA. In an IRA, you are not taxed on interest, so your money has the opportunity to compound over time, and you pay taxes when you make withdrawals.

An IRA is a plan that allows you to invest your money for retirement through an investment firm. In a regular IRA, the contributions are not taxed as income and the withdrawals are taxed as ordinary income. You can choose what stocks, bonds, ETFs, or mutual funds you want to allocate your money to and then leave your money invested until retirement. From that point, you can only receive your money at age 59 ½ (or earlier if you’re willing to pay some penalties), which encourages investors to leave their money saved for later. In my opinion, it is wise to fund both kinds of these accounts for retirement, as there are contribution limits of $5,500 for investors below the age of 50 for IRA accounts. However, either way, it is smart to begin saving as you see fit.

The best way to start saving is to start small. Even the littlest of contributions can end up getting you into a habit of making contributions in the future. So, figure out how much you aim to save early and start making small deposits when you can. The money you put into these accounts should be left until your retirement and trust me, you’ll thank yourself at age 59 ½.

 

Best Wishes,

Another Young Money-Saver