When and How To Start Saving for Retirement

When to start saving for retirement

If you’ve just started your first “adult” job, you may be earning more money than ever before. You could have new expenses, too. If this is your first time living independently, you’re now responsible for costs such as paying rent, utilities, groceries, gas, insurance and all your other living expenses. Plus, you may be paying off student loans or saving for a new car. Setting aside money for retirement might not be something you want to do right now, but investing at an early age offers a boost toward achieving long-term goals.

Is it ever too early to start saving for retirement?

In short, no, it’s never too early. Saving for retirement while you’re in your 20s, for example, gives your savings more time to benefit from potential compounding. Compounding occurs when investments generate earnings, and those reinvested earnings generate additional earnings. Therefore, you have the potential to earn increasingly more money on your contributions and your earnings over time. The longer the compounding process has to repeat itself, the larger your account balance may be at retirement. That’s why investing early is so important.

How to start saving for retirement

Young workers whose employers offer a retirement savings plan, such as a 401(k), should consider participating as soon as they’re eligible. For those without access to an employer-sponsored plan, opening an individual retirement account (IRA) can provide a similar opportunity to save consistently and benefit from tax advantages and long-term compound growth. Pretax contributions are deducted before paychecks are distributed, so there is no temptation to spend that money, while any match that an employer contributes is essentially free money. Savings and investment earnings can grow tax-deferred in the plan and have many years to benefit from potential compound growth.

Over time, the relatively small amounts contributed each pay period can really add up. The two most common employee-sponsored retirement plans are a traditional IRA and a Roth IRA.

What’s the difference between a traditional IRA and Roth IRA?

The differences between the two are how they’re taxed.

• Traditional accounts allow for pre-taxed contributions, which means you’ll pay taxes when you retire and withdraw the money.
• Roth accounts require after-tax contributions. This means you’ll pay the taxes today, making the qualified withdrawals in retirement tax-free.

Your choice depends on whether you expect to be in a higher or lower tax bracket later in your career.

When to review your retirement account contributions

You should be reviewing your contributions periodically, aligned with certain career and life milestones. This can be when:

• You receive a raise or promotion: A salary increase, whether from an annual raise, promotion or expanded role, is a good opportunity to reassess your retirement savings. Because your income has increased, you may be able to contribute a higher percentage or move closer to the maximum allowed in your employer’s plan without significantly affecting your lifestyle. If you contribute as a percentage of pay, your savings may increase automatically as your salary grows.
• You receive a bonus or tax refund: One‑time payments like bonuses or tax refunds can be an easy way to boost retirement savings. Since these funds aren’t typically part of your regular budget, directing some or all of the amount toward your retirement plan or an IRA may have little impact on day‑to‑day expenses while giving your long‑term savings an extra lift.
• It’s financial checkup time: Your annual financial review should include a look at your retirement accounts. If your finances have taken a turn for the better, you may be able to increase your contributions. Paying off your car or other loans might leave you with extra money each month that you could invest for retirement.

No matter what your current financial situation, try to contribute at least as much as your employer will match your retirement account to maximize the benefit. Read more about the retirement planning journey and different stages.