Saving for Retirement: Yes, You Should Start Thinking About It Now

We are introduced to many elements of the financial world in our early twenties; however, retirement may not be an aspect we often think about. But it is one of the more important things to plan for financially. So when is the best time to begin saving for retirement? Now, or immediately after you graduate and enter the real world.

Saving for retirement from an early age can add hundreds of thousands of dollars to your nest egg over time. Long-term investments, such as retirement plans include the element of compound interest, which means you gain interest on both the initial money you put up front, and interest you gain on your upfront payment. This process continues throughout the length of your retirement plan, leading to exponential growth that you’ll miss out on if you don’t start a plan early.

Saving from a young age could be more important for us than it was for older generations. Unless you work in the public sector or work with membership in a powerful union, pensions are likely a thing of the past. Additionally, Social Security is in bigger trouble than it’s ever been, and a strong possibility of cuts exists. The ultimate point is that now is not too early to begin thinking about saving for retirement.

Many of us will work for companies that offer 401(k) plans, but what exactly is a 401(k)? It is a plan designated in the IRS tax code that allows employees to invest in a combination of mutual funds with stocks, bonds, and money market instruments. Although the individual investor has different options of what types of investments to make within his or her plan, the most common selection tends to be a combination that gradually becomes more conservative as the investor reaches retirement. This probably doesn’t sound particularly special, but what sets it apart is that money contributed to this fund grows free of any taxes until retirement, at which point the withdrawal is taxed as ordinary income.

Many employers will also match your contribution to the plan up to a certain point. The Wall Street Journal (WSJ) cites the Profit Sharing Council of America’s assertion that the most popular match made by employers is 3%, meaning that if you contribute 3% or more of your annual salary towards your 401(k) your employer will match your contribution by adding the amount equaling 3% of your annual salary. Even if you do not want to portion a high amount of your salary to your 401(k), you should at least contribute the amount required for an employer match, as not doing so is akin to passing up free money over time.

Another difference between our generation and those before ours is the sheer amount of times we will change jobs. It was common for our parents and grandparents to work for one company from graduation until retirement, but that will be an incredibly rare occasion for our generation, which raises the pertinent question, “What do I do with my 401(k) money when I switch jobs?” You could either, withdraw the money from your plan, keep the plan as is, transfer the money to your new employer’s plan, or transfer the money to an Individual Retirement Account.

Withdrawing the funds in your 401(k) is almost never a good idea, as the instant gratification of cash on hand will quickly evaporate. According to CBS Money Watch, there is generally a 10% withdrawal fee associated with cashing out before age 55. Also, if you remember earlier, withdrawn funds are immediately taxed as ordinary income, so you’ll lose your tax exemption. Lastly, and probably most importantly, you’ll miss out on all the additional compounding interest you would’ve continued to receive. In a job transition, withdrawal is generally unwise.

Keeping your money in your current 401(k) is preferable to withdrawal, however according to the New York Times, additional funds cannot be contributed to a company’s 401(k) after you have left the company. Therefore, rolling over the money to your new company’s 401(k) or to an IRA are generally the two best options, as you will be able to continue generating interest tax-free without a harsh withdrawal penalty.

Your future employer may automatically enroll you in a 401(k), but you need to actively manage it to get the most out of it. Even with all the different paths to saving for retirement though, the most important thing to do is start saving early.

Saving for Retirement: Yes, You Should Start Thinking About It Now

We are introduced to many elements of the financial world in our early twenties; however, retirement may not be an aspect we often think about. But it is one of the more important things to plan for financially. So when is the best time to begin saving for retirement? Now, or immediately after you graduate and enter the real world.

Saving for retirement from an early age can add hundreds of thousands of dollars to your nest egg over time. Long-term investments, such as retirement plans include the element of compound interest, which means you gain interest on both the initial money you put up front, and interest you gain on your upfront payment. This process continues throughout the length of your retirement plan, leading to exponential growth that you’ll miss out on if you don’t start a plan early.

Saving from a young age could be more important for us than it was for older generations. Unless you work in the public sector or work with membership in a powerful union, pensions are likely a thing of the past. Additionally, Social Security is in bigger trouble than it’s ever been, and a strong possibility of cuts exists. The ultimate point is that now is not too early to begin thinking about saving for retirement.

Many of us will work for companies that offer 401(k) plans, but what exactly is a 401(k)? It is a plan designated in the IRS tax code that allows employees to invest in a combination of mutual funds with stocks, bonds, and money market instruments. Although the individual investor has different options of what types of investments to make within his or her plan, the most common selection tends to be a combination that gradually becomes more conservative as the investor reaches retirement. This probably doesn’t sound particularly special, but what sets it apart is that money contributed to this fund grows free of any taxes until retirement, at which point the withdrawal is taxed as ordinary income.

Many employers will also match your contribution to the plan up to a certain point. The Wall Street Journal (WSJ) cites the Profit Sharing Council of America’s assertion that the most popular match made by employers is 3%, meaning that if you contribute 3% or more of your annual salary towards your 401(k) your employer will match your contribution by adding the amount equaling 3% of your annual salary. Even if you do not want to portion a high amount of your salary to your 401(k), you should at least contribute the amount required for an employer match, as not doing so is akin to passing up free money over time.

Another difference between our generation and those before ours is the sheer amount of times we will change jobs. It was common for our parents and grandparents to work for one company from graduation until retirement, but that will be an incredibly rare occasion for our generation, which raises the pertinent question, “What do I do with my 401(k) money when I switch jobs?” You could either, withdraw the money from your plan, keep the plan as is, transfer the money to your new employer’s plan, or transfer the money to an Individual Retirement Account.

Withdrawing the funds in your 401(k) is almost never a good idea, as the instant gratification of cash on hand will quickly evaporate. According to CBS Money Watch, there is generally a 10% withdrawal fee associated with cashing out before age 55. Also, if you remember earlier, withdrawn funds are immediately taxed as ordinary income, so you’ll lose your tax exemption. Lastly, and probably most importantly, you’ll miss out on all the additional compounding interest you would’ve continued to receive. In a job transition, withdrawal is generally unwise.

Keeping your money in your current 401(k) is preferable to withdrawal, however according to the New York Times, additional funds cannot be contributed to a company’s 401(k) after you have left the company. Therefore, rolling over the money to your new company’s 401(k) or to an IRA are generally the two best options, as you will be able to continue generating interest tax-free without a harsh withdrawal penalty.

Your future employer may automatically enroll you in a 401(k), but you need to actively manage it to get the most out of it. Even with all the different paths to saving for retirement though, the most important thing to do is start saving early.