When Should You Begin Saving for Retirement: Complete Guide

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Every young person that enters the workforce has a dream of making millions of dollars and retiring early, with plenty of money in the bank. However, when someone in their 20s thinks about retirement, it seems such a long way off, that many Americans make the mistake of putting off saving until later in life.

Americans are now a nation of spenders more than they are savers, and this is apparent in the millennial generation. Millennials are the generation born between 1980 and 2000, accounting for more than 75-million Americans. Research shows that millennials are more inclined to focus on spending their money on experiences, rather than saving for retirement.

Some members of the millennial generation adopts the maxim of spend now and enjoy your best life, and worry about financial problems later. This haphazard investment strategy may end up costing millennials their future, as they become enslaved to revolving debt.

With the average minimum wage being $7.25, as mandated by Federal legislation, there are only a few States that exceed this limit, Washington leading the reform with a minimum wage of $11.50.

Work or Study?

After completing their high school education, young Americans have two options available to them in starting their adult future. Most high school graduates either decide to take on tertiary education at college, or join the workforce in a minimum wage position. Some may choose to open a business, but that’s such a small percentage, that it’s not worth looking at in this example.

Millennials that decide to enroll in college, often require the use of federally mandated student loans to fund their education. According to data from the U.S. Bureau of Labor Statistics, the cost of a college education increased by nearly 400-percent over the last three decades.

Statistics also show that the average cost of obtaining a degree in 2019, is around $36,000. Currently, there is over $1.6-trillion in outstanding student loans, with 11.4-percent of all loans being delinquent as of H2 2019.

Graduating with a degree, and a substantial amount of student debt places the millennial in a precarious position. They may obtain a high-paying job, but face a mountain of debt that they need to repay before they start to get control of their finances.

The second option is to enter the workforce. However, due to a lack of skills, these millennials often end up in low-paying jobs that only offer the minimum wage. Some may start apprenticeships that put them on the path to learn skills to improve their salary, and the experience to start a business.

However, for the most part, they end up as baristas, bartenders, or as a part of the “gig economy,” where they end up as Uber drivers or freelancers struggling to get by.

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The Savings Conundrum

It’s challenging to think about saving when millennials are making minimum wage, or drowning in student loan debt. Millennials that decide to save some money, or experience a windfall such as an inheritance, often choose to spend the money instead of investing it into an asset.

The rise of social media has also had an impact on how millennials spend their cash. Research shows that millennials are far more likely to save for vacations and lifestyle goods than they are to funnel their extra funds into a retirement account.

Going to work each day, to make money to save for retirement is tedious – especially when all of your friends are posting pictures of their exotic getaways on Instagram. Scroll through millennials feed, and you’re likely to see images of $10 lattes and $30 avocado-on-toast than stories of how they are saving for retirement.

Expectations Vs. Reality

Living your best life as a millennial may end up costing you dearly in the future. When we are young, we feel invincible. As a result, many millennials brush off the need to save. The typical attitude towards avoiding saving in their twenties is that they will worry about that in their thirties and forties. Studies show that most millennials, especially those with college degrees, expect to be business owners or in a high paying job by the time they reach their late twenties.

However, further research shows that this is not the case. For the majority of American millennials born between 1980 and 1990 – those individuals that are in their thirties, they are still struggling financially. Many of them live paycheck-to-paycheck, with mounting credit card debt, auto loans or leases, and most are still trying to pay down their student loan balances as well.

This reality is a far cry from the expectations of a high-paying job and plenty of cash in the bank. Many millennials in this age bracket fail to account for the fact that they will start a family in their late twenties. Along with children comes the need for a home and a mortgage, adding more pressure to the melting pot that is their finances.

Due to mounting debt accumulating in their twenties, many millennials rely on credit to get by in their thirties. Maxing out credit cards and acquiring personal loans is commonplace among millennials, and with over $4-trillion in consumer debt floating around the economy, it’s not surprising to learn that the average credit card debt in the United States exceeds $5,000.

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The Problem with Failing to Save

If you spend enough time practicing a habit, it becomes normal behavior, even if you know it is dangerous. Take smoking cigarettes, for example. Most people have heard that it’s terrible for your health, and it’s the leading cause of death in the United States. Smokers know they need to quit, but their addiction keeps them smoking. As a result, they try to convince themselves that they will stop one day in the future before they start to experience adverse health effects related to the habit.

However, the smoker ends up never quitting, as their addiction becomes part of their normal behavior. As a result, when the smoker comes down with emphysema or COPD later in life, they are filled with regret as to why they never kicked the habit earlier.

The same example applies to your finances and saving. Saving is a behavior ingrained in your consciousness as you earn money. If you fail to start saving early and spend all of your money each month while accumulating debt, you are establishing this as typical behavior. Therefore, when you do experience an increase in your salary or a financial windfall, you are more likely to spend the funds that send them to your savings account.

It’s for this reason that many millennials are in high-paying jobs, but spend more than they earn, and have little to nothing in the way of savings and investments. Instead, they rely on a steady revolving line of credit to fund their lifestyle, placing them one paycheck away from being homeless. This situation is precarious for any single person, but the dangers of this financial situation are far greater when the millennials have a young family.

Rates of homelessness continue to skyrocket across the United States, with hundreds of tent-cities popping up across the country. Unfortunately, drug addiction plays a significant role in this crisis, but the leading cause is people that go broke and have nowhere to go.

The Benefits of Starting to Save When You’re Young

Ingraining the habit of saving should begin when you are young, and the younger – the better. Parents should adopt the practice of teaching their kids how to save from as early an age as possible. Giving your child an allowance and telling them to put a portion of it in their piggy bank is an excellent way to start teaching your child financial responsibility.

Teens can benefit from the same strategy. If your teenager gets a part-time job delivering pizzas or newspapers, teach them the responsibility of saving, rather than letting them spend all of their money as they please. Open a savings account, and monitor their monthly statements to ensure they are meeting their savings goals.

Explaining the importance of saving toward a goal is vital for young people to understand as they head towards their early adulthood. Ingraining this financial responsibility into your kids ensures that they have a firm grasp on how money works, giving them an edge over the rest of their generation. Increasing your kid’s financial literacy, and teaching them about investing in their teens will pay off handsomely in their twenties and thirties.

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Why You Need to Start Saving at a Young Age

Starting saving while you are young can have a tremendous impact on the growth of your savings by the time you hit retirement. Let’s take an example of starting to save at age 20.

If you put aside $3,000 into an IRA every year for 10-years and stop saving when you are 30-years old, then you will have amassed $338,000 in your investment by the time you retire at 60. (assuming an average annual return of 7-percent.) In this instance, you put in $30,000 of your income over 10-years and made a return of more than $300,000.

If you put off saving until you reach 30, and make the same annual $3,000 contribution to an IRA, with the same 7-percent return. Only, in this situation, we will save for 30-years, as opposed to the 10-years in the first example. As a result, you will contribute $90,000 to the fund over 30-years, but you will only have a cash balance of $303,000.

As you can see, there’s a significant difference between starting in your twenties or your thirties. The earlier you start saving and investing, the far better off you and your family will be when you hit your retirement age.

The Power of Compound Interest

You might be wondering how the above example is possible. After all, if you put $90,000 into your savings account or IRA, then you would expect it to grow into far more than starting with $30,000.

The secret to accumulating wealth in your savings comes from the effect of compound interest.

To explain this concept, let’s use an example of investing $1,000 in a safe government bond that yields 3-percent per annum.

  • By the end of the first year, your investment grows to $1030 – that’s hardly anything to get you excited.
  • However, the following year, your investment grows by a further 3-percent, on the total amount of your capital, being $1,030 As a result of the compounding effect, you now have $1,060 – which is still nothing to write home about.
  • However, there is a point where you return start to reach for the moon. In the 39th year of your investment, you have $3,167 in your account. In the 40th year of your investment, you experience a return for the year that amounts to $95, leaving you with $3,262. Every year afterward, will see an exponential growth in your money that equates to about 3-times more than in the first year of the investment.

What if you keep saving and investing more into this account over the 40-year term? What if you choose assets that yield more than 3-percent?

By now, you should be beginning to see why starting saving at a young age, can dramatically improve your financial position when you retire.

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How to Start Saving – The Importance of Goal Setting

When it comes time for you to start saving, chances are you have no idea about where to place your money. Leaving it in the bank at a 0-percent interest rate won’t do you any favors – as the fees and bank charges will eat away at your savings, while providing you with no compounding effect.

Hire a personal financial advisor to assist you with outlining a plan to meet your retirement goals. Your advisor will walk you through setting up your investment strategy, using the following criteria.

  • Your current age, and when you plan on retiring.
  • Assessing all of your income streams and expenses and what you can afford to save each month.
  • Where you plan to retire, and what you will need in your savings to meet your retirement needs.
  • How you need to allocate funds for your kid’s future education.
  • How your health will affect your retirement goals.
  • Your risk tolerance, and potential investment vehicles.

After acquiring all of the relevant information, your advisor creates a road map for your finances and investments to meet your retirement goals. After you have the plan, all you need to do is commit to meeting your monthly contributions.

Wrapping Up – The Key Takeaways

Avoid the modern culture of spending over saving, and start investing in your retirement in your early twenties. Limit your debt and increase your income, then send the surplus funds into your IRA or 401(k) plan.

Understand the power of compound interest, and don’t make any early withdrawals on your retirement savings that may slow your investment goals.

Have a professional advisor outline an investment strategy that meets your retirement goals, and then stick to the plan.


Oliver Dale is Editor-in-Chief of MoneyCheck and founder of Kooc Media Ltd, A UK-Based Online Publishing company. A Technology Entrepreneur with over 15 years of professional experience in Investing and UK Business.His writing has been quoted by Nasdaq, Dow Jones, Investopedia, The New Yorker, Forbes, Techcrunch & More.He built Money Check to bring the highest level of education about personal finance to the general public with clear and unbiased

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