Your twenties is a hip time of your life. It’s when you truly get a taste of freedom and responsibility, start earning, and see more of the world. At this age, it seems far-fetched that you should even think of retirement. After all, you still have at least 30 years’ worth of income ahead of you.
Experts, however, believe that the sooner you plan for your life-after-work funds, the better. And many subscribe to this idea. Bankpatriot.com, a New York- and Connecticut-based community bank, reports that about 42% of college-aged individuals in Westchester, Fairfield have already initiated a retirement plan.
The reason behind this is that you have more time to grow your money.
How Much Money Could Grow
CNN Money cites compounding as the magic element behind growing a retirement nest egg. Compounding means that a financial institution pays you interest for the original amount you invested, as well as the interest that the original amount previously gained.
For instance, you start saving at 25. You set aside $3,000 every year for a decade and then stop saving. By the time you reach 65, the $30,000 investment would balloon to $338,000, if the bank set a 7% annual return.
In contrast, say you start saving at 35. You set aside $3,000 every year for three decades, reaching a sum of $90,000. By the time you reach 65, the $90,000 will only grow to $303,000 (assuming a 7% annual return). So, saving up early gives your money more time to compound.
The Sufficient Retirement Nest Egg
The Fool, an online financial publication, estimates that the average American retirement fund should be around $1.3 million, assuming that an average male lives up to 84.3 years, while an average woman lives up to 86.6 years.
Bear in mind, however, that exactly how much you should save depends on many factors, including your target retirement age, comfortable standard of living, and medical costs. Many online retirement calculators can help you determine the right nest egg size, and, by extension, how much you need to save during your twenties.
To plan for your retirement, Forbes enumerates two steps. One, save little yet often. Experts say that you should set aside about 10% of your income during your 20s. Those in volatile industries like start-ups should save a little more. Second, you should find jobs that offer retirement benefits. Experts strongly recommend signing up for companies that offer a 401(k) loan.
With freedom come responsibilities. When you’re in your twenties, it pays off to draft concrete plans for your future — your retirement, especially. By the power of compounding, a little saving during the prime of your youth can go a long way.