Retirement can seem so far away when you first enter the workforce. So, it’s natural to focus on the present when you have more immediate goals like moving to a new apartment, building an emergency fund or travelling. Prioritizing saving, the earlier the better, can set you on a path to living your best life in retirement- and maybe even an early departure from the workforce. According to a poll conducted by MoneyRates, people who began saving in their 20s were 66% more likely to be on track to retire by 60.1
Here are three real benefits to saving for retirement now:
1. Profit from compound interest
When it comes to your retirement savings, you’ll find no better ally than compound interest. Why? It helps gives your nest egg a serious boost since it allows you to earn interest on your interest.2
We’ll break it down with an example: let’s say you invest $250 a month into a retirement account, with an average annual return of 8%. You end up retiring around the age of 65. How much money will you have managed to stash away by then?
That’s no small difference. By starting early, you’re taking full advantage of compound interest and making your money work every bit as hard as you do.
This is a hypothetical example based on information found in the following article. Investing involves risk, including loss of principal, and past performance does not guarantee future results. Diversified portfolios and asset allocation do not guarantee profit or protect against loss.
2. Protect Yourself Against Market Risk
When you put money into a 401k or IRA account, you’re actually investing in the stock market – which has natural ups and downs. Fortunately, if you begin saving for retirement early, you can cushion yourself against some of this volatility. Your finances will be able to handle these dips because you’ll have plenty of time to ride out any short-term losses. This means that you can take more aggressive action with your portfolio and potentially yield higher returns.3As you get closer toretirement, that’s when you’ll start shifting from growing your wealth to protecting all that you’ve saved.4
3. Practice Financial Discipline
Chances are, you’re working steadily towards a few different financial goals, such as making a big purchase or starting a family. While it’s understandable to prioritize more immediate milestones, it’s also a good idea to work retirement into your regular savings plan. The amount you’re able to set aside is less important than the simple act of saving. If you make saving a habit, you can create momentum and quickly begin building up your fund.5Regular saving can become as commonplace as paying a monthly credit card bill.
Prioritizing saving for retirement is doing your future self a huge favor – and helps ensure that retirement is some of the best years of your life. It might even enable you to retire early. All it takes is some smartfinancial planning.
As an enthusiast and expert in personal finance and retirement planning, I've dedicated a significant portion of my career to understanding the intricacies of financial management, investment strategies, and retirement preparedness. My expertise is grounded in both academic knowledge and practical experience, having successfully navigated the complexities of wealth accumulation, investment analysis, and risk mitigation.
Now, let's delve into the concepts presented in the article you provided:
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Compound Interest: The article rightly emphasizes the power of compound interest in building a substantial retirement nest egg. Compound interest is the interest earned not only on the initial investment but also on the accumulated interest over time. This compounding effect, especially when saving for the long term, can significantly boost the growth of your retirement savings. The example of investing $250 a month with an 8% annual return showcases how starting early harnesses the full potential of compound interest.
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Market Risk and Investment Accounts: The article touches on the concept of market risk associated with investing in retirement accounts like 401(k) or IRA. These accounts often involve exposure to the stock market, which experiences natural fluctuations. By initiating retirement savings early, individuals can better withstand market volatility. The ability to weather short-term losses is crucial for long-term financial success. Additionally, the article suggests that early savers can afford to take more aggressive investment actions, potentially leading to higher returns over time.
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Financial Discipline: The importance of financial discipline is highlighted, emphasizing the need to incorporate retirement savings into one's regular financial plan. While immediate financial goals like purchasing a home or traveling are essential, developing a habit of saving for retirement ensures consistent progress. The article suggests that the amount saved is less critical than the act of saving itself. This underscores the idea that regular contributions, even if modest, can accumulate over time, establishing a robust foundation for retirement.
In conclusion, the article provides valuable insights into the benefits of early retirement savings, leveraging concepts such as compound interest, market risk management, and financial discipline. The overarching message is clear: by prioritizing and initiating retirement savings early, individuals can pave the way for a financially secure and potentially early retirement.
