3 Reasons It’s Important To Start Saving for Retirement Early

You might feel too young to worry about retirement or have other financial goals you’d prefer to focus on first, such as paying off student loans or saving a home down payment. However, a survey by Voya Financial revealed that 64% of Americans wish they had started saving for retirement in their early 20s.

Here’s a look at the importance of starting your retirement savings early and how much it can pay off.

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Benefits of Starting Retirement Savings Early

Young people have some distinct savings advantages over older people. Consider the following benefits to see why consistently putting aside money for retirement from an early age is a wise financial practice.

Compound Interest and Time

When you leave money in a savings account, you earn interest on the principal. However, over time, you also earn interest on your earned interest, a process called compound interest. The earlier you start saving, the more time compound interest can grow your money.

Similarly, when you leave money in the stock market or other investments long term, you also use your money to earn more money over time.

To see how beneficial compound interest is over long periods, use the following table to compare the interest earned on a one-time $10,000 deposit into a high-yield savings account over varying periods. Assume a 5.00% APY compounded monthly.

Or compare the interest earned on a $100 monthly investment earning a 5.00% APY compounded monthly until age 67, which is the current full retirement age for anyone born after 1959.

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Greater Risk Flexibility

You have several options for growing your retirement savings, from safe, guaranteed investments, such as high-yield savings accounts and CDs, to higher-risk investments with a loss potential, such as stocks or mutual funds. Investing in stocks or other higher-risk assets might seem daunting, but it has the potential to generate higher returns.

In the first compound interest example, a $10,000 one-time deposit earned $28,466 over 27 years at a 5.00% APY. Suppose you invested that $10,000 in the stock market instead, specifically S&P 500 stocks, over a 27-year period from 1996 through 2023. S&P 500 historical data shows that $10,000 would be worth $129,866. That’s a return of 9.59% per year despite the many market ups and downs during the period.

When you’re young, you can better afford to take on more investing risk because you have time to recover from any losses before needing access to your retirement savings. Since older investors may need to tap into retirement funds sooner rather than later, advisors may recommend moving funds into safer investments to help protect against loss.

Stress-Free, Lower Monthly Contributions

An early start to retirement saving, especially in your 20s, can reduce the amount you need to save each month since your money has longer to grow. Small, regular retirement contributions can make it easier to build a sizeable nest egg while saving for other financial goals.

Starting early also helps you avoid the stress of playing catch-up in your later years. If you delay saving until your 40s or 50s, you might need to save a considerable monthly amount to reach your goal, possibly while raising a family, helping children through college or providing financial support to aging parents.

Suppose you want to save $1 million by age 67. The following table shows approximately how much you must save each month starting at different ages, earning a 5.00% rate of return.

How Much of Your Income Should You Save for Retirement?

If you’re getting an early start to retirement saving, a good rule of thumb is to save at least 15% of your income. Some financial experts include any employer contributions into a company-sponsored 401(k) or SIMPLE IRA in that 15%. Others recommend saving 15% plus any employer contributions. If you aren’t taking advantage of your company-matched retirement plan, consider signing up and allowing your employer to help you grow your savings.

If 15% feels like too much right now, start with a smaller percentage and gradually increase it as your income grows. By saving consistently and taking advantage of compound interest over time, you can build a substantial nest egg that can provide a comfortable retirement without feeling overwhelmed or neglecting other financial goals.

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