You Are Never Too Young to Save


Young man at work When you're in your 20s and just starting a career, contributing to your retirement savings plan at work might be the last thing on your mind. After all, retirement is probably 35 to 40 years away, and right now, you're focused on more immediate things like making payments on a student loan, car loan and credit cards while putting food on the table, clothes on your back and a roof over your head.

But a retirement savings plan is just too good to pass up. Saving for your retirement is easier than you think, and starting now is critical to your financial security and peace of mind. Let's clear up some of the most common misconceptions that people in the early stages of their careers tend to have about saving for retirement.

1. "It won't matter if I wait a few years to start saving."

If you start setting aside even a few dollars per paycheck now, rather than later, you'll give yourself more time to take advantage of the power of compounding, in which earnings create more earnings, fueling the growth of your savings.

Getting an early start on retirement savings can pay off in a big way. Let's look at Jen and Adam. Each saved $30,000 over 20 years—$1,000 annually for the first 10 years and $2,000 annually for the second 10 years. Each returned an investment rate of 8% a year. Jen decided to save starting at age 25 and stop at age 44. Adam chose to start saving at a later date, beginning at age 45 and stopping at age 64. The chart below shows both Jen and Adam’s retirement savings at age 65 (not accounting for taxes).

Scenario Amount Saved Retirement Savings at age 65
Jen starts saving at age 25 $30,000 $280,800
Adam starts saving at age 45 $30,000 $60,250

Although Jen and Adam each saved the same amount and each earned 8% on their investment, Jen ended up with over $220,000 more in retirement savings than Adam. Why? Because her money enjoyed 40 years’ worth of growth, whereas Adam’s had only 20. Since Adam started saving later, he would need to save more than four times as much as Jen to end up with the same retirement savings at age 65. By putting away just $42 from a bimonthly paycheck when she was 25, Jen put herself in a much stronger position when she was ready to retire.1

2. "I'm not missing out on much by not being in the savings plan at work."

Actually, you're missing out on a lot, starting with two key benefits:

Tax advantages
When you save on a pre-tax basis to a plan like the one you have at work, your contributions reduce your current-year taxable income and, in turn, your tax liability for the year. For example, if you earn $30,000 a year and contribute $5,000 on a pre-tax basis to the plan, you’ll pay income taxes on $25,000 instead of $30,000. You won't owe taxes on the money you contributed on a pre-tax basis until you withdraw money from your account, generally after you retire.2

Matching contributions
In addition to the tax advantages outlined above, your employer may add to your savings by matching at least a portion of what you contribute. For example, your employer may contribute 50 cents for each dollar you put in up to a certain percentage of your pay (although matching contributions vary from plan to plan). If your salary is $50,000 and your employer matches 50 cents on each dollar you contribute from the first 6% of your pay, the numbers will look like this:

6% of $50,000  $3,000
50% of $3,000  $1,500

Matching contributions to your account, along with earnings on them, are tax-deferred until you withdraw them in retirement.

3. "I won't be working here long, so it doesn't make sense to start saving in the plan now."

The contributions you make to the plan yourself, plus any investment earnings on those contributions, will continue to belong to you even when you leave your employer. (You will need to check on your employer’s plan vesting rules, if any, on matching contributions.)

When you do leave your employer, you'll have several options on what to do with your vested balance in the plan.

  • Leave your money in the old plan. If your balance is more than $5,000, your employer will be required by law to let you leave your money in the plan.
  • Do a rollover. You can transfer your money to an IRA or a new employer's qualified plan, if that plan accepts rollover contributions. The transferred money can remain tax-deferred in the IRA or new plan, with no penalties.
  • Cash out. When you leave your job, you'll be allowed to take a lump-sum distribution of your vested account balance. However, this is often a bad idea, because you will have to pay taxes on the payout and you might owe a penalty.

4. "I'm not disciplined enough to save on a regular basis."

Once you start saving in your plan, sticking with it will take little or no discipline. You just set up ongoing payroll contributions to the plan and then sit back and relax, because from that point on, you'll be saving on automatic pilot.

At least once a year, or more often if you go through a life change like marriage, divorce, or bringing home a new child, you'll need to revisit your investment mix and decide if any changes are warranted. And as time goes by, you should periodically look into whether you can increase your contributions to get even more out of the plan.

5. "Saving will get easier when I get older."

Sure, you might make more money down the road, but your expenses will probably go up, too. Over the years, you'll be taking on bigger expenses, which might include a home purchase, a wedding, children, paying for their college education and so on. That's just how life goes, and there's really no telling whether saving will become easier for you later than it is now. The world is full of people in their 30s, 40s, and 50s saying, "I wish I had started saving for retirement when I was in my 20s."

6. "Investing is too complicated."

It doesn’t have to be complicated. A professional financial or investment advisor can help you get the most out of the investment options offered by your retirement savings plan. And even if you're more of a do-it-yourselfer, TIAA-CREF offers a wealth of financial and investing education resources.

One of the easiest investment options you can choose is a lifecycle fund. It offers a single, straightforward solution to investing based on your expected retirement age. Each fund’s asset allocation automatically shifts from being more aggressive to less aggressive as you get closer to your retirement date.

Securing your future

As you can see, these six myths are simply myths. You should not let them hold you back from saving for your future. Contact your benefits department to learn how you can take advantage of your plan's rewards. Once you become an active participant in the plan, you might wonder what took you so long to get in on the action.

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