When Should Retirement Saving Begin?

 One of the most frequent questions our financial planners get is “When do I need to start saving for retirement?” followed closely by “How much should I be saving?” The simple answers are “Today” and “As much as you can afford to.” Of course, things are not usually that simple.

We’re going to discuss how saving for retirement is not only about the amount of money you’re putting away, but also when those funds are being put away. Early retirement wealth management is critical to ensure your time after the office is attainable and suitable for your lifestyle.

Before we jump in, let’s review why starting to save sooner rather than later is an imperative component of one’s retirement. Time value of money is how we view the value of money today compared to the value of money in the future; this is a key concept in understanding retirement wealth management. Furthermore, a dollar today is truly worth more than a dollar tomorrow due to inflation and compound interest. Head over to our blog on Time Value of Money for more information.

It’s Never Too Early to Start Saving

There are many variables that can affect retirement planning such as desired retirement age, anticipated health care costs, and more. In any case, the sooner retirement savings begins the better. Summit Financial will help navigate these variables and provide an easy to follow retirement management plan that fits your needs.

The professionals at Summit Financial Consultants recommend setting aside 8-10% (or more if possible) of one’s paycheck as soon as a person starts to earn a paycheck. For most people, this begins in their early 20s. If 8-10% is too high because of student loans or other obligations it is still important to determine what can be saved and to follow through. Money saved during the critical early years will compound and grow over time. The duration (i.e. length of time) of saving is the foundation of sound retirement planning.

It’s beneficial to start saving when young because it’s a reinforcement to continue saving for retirement as one takes on additional financial burdens (home, car, family, etc.). It can be taxing to start a retirement nest egg at the beginnings of your professional career, but in the long term, this is a great step towards a stable retirement.

Consider the following: If one sets aside $5k/ year for 40 years (growth rate of 6%) the future value would be around $773k. If you compare that to waiting 20 years, but then doubling the savings rate (save $10k/ year) for only 20 years, with an identical growth rate, the future value would be roughly $367k. In this scenario the total investment is the same, however, due to inflation and compounding interest, there is a $405k difference if one starts to save for retirement 20 years sooner.

To go one step further, consider a person who was born in 1954 and would like to retire at age 66 when full social security benefits are available. Their target year to retire is 2020 and the individual should have started saving $5k/ year in 1980 if they required $773k to retire.

Bottom line: the earlier retirement savings begins, the more the original investment is most likely worth.   In any case, our professionals at Summit Financial Consulting will take the time with you to put you on a path towards retirement success. Regardless of age, our team specializes in retirement wealth management and we develop a specifically tailored plan that benefits you and your retirement goals.