It’s never too early to start thinking about retirement.
If you are a high school or college student, you might be saying, “What are you talking about?” Because that phase of your life seems so far off and you have a lot of living to do between now and the end of your formal working years.
You are probably more concerned about paying for college if you’re still in high school. Or if you are already a college graduate, you might have student loans that you’re worrying about repaying rather than thinking about other far off financial responsibilities.
You may still be looking for your first job while competing against other graduates for the limited number of available opportunities. Or maybe you’re trying to figure out how you’re going to pay for your apartment, car, insurance and food! Understandably, retirement planning is probably way at the bottom of your financial to-do list.
Taking care of current needs is a legitimate reason for delaying your focus on retirement planning, but starting sooner rather than later is really the smartest choice you can make.
Why You Need A Plan
So what’s the big deal about planning for retirement in your late teens and 20’s?
In the past, workers relied heavily on the company pension plan to fund and support them in their retirement years. Unfortunately, many employers have done away with their employee pension plans. And those corporations, companies and small businesses who still have pensions are considering dropping their traditional plans completely for all new employees they hire.
A pension is a set amount of money a company sends to workers who have retired. Another commonly used name for a pension is a retirement check. Both private and public sector employers offer pensions. Employees who reach the eligible retirement age are guaranteed a predictable amount each month in their checks.
With most pension plans the employer is normally responsible for funding the employee pension. Often, an employee can decide if they also want to contribute, and sometimes, the company may require their employees to contribute to their retirement plan.
Retirement plans can be very different from job to job, so you should make sure that you fully understand what your employer will and will not do to support your retirement.
No Pension? Now What?
Employers who have decided to drop their pension plans have mainly done so because they decided the plans are too expensive. What this means for you is that you will most probably need to save for your own retirement. This is true whether or not your employer offers a match to the money you contribute to your retirement account.
Many companies are replacing their pension plans with 401(k) plans. A 401(k) Plan is a defined contribution plan meaning employees contribute a fixed amount or a percentage of their paychecks to an account that is intended to fund their retirements.
Employees who participate in 401(k) plans, or similar plans such as the federal government’s Thrift Savings Plan (TSP), become responsible for their future retirement income by contributing part of their income from each paycheck to their retirement account. And, in many instances, the employee must oversee their own investments.
Start Early and Stay Consistent
While retirement seems so far away, by starting early, you can take advantage of both time and opportunity. Both of these elements can work together and allow you to start with smaller amounts and then grow your contributions over time.
For example, if you invest $250 a month (assuming an 8% interest rate), you will have the following amounts at age 65 based on when you start starting saving:
- age 25, you will have $878,570
- age 35, you will have $375,073
- age 45, you will have $148,236
So it’s clear to see why you should start the savings habit early! Even small amounts combined with a longer time span will pay off big in the future. Visit the IRS for more information on 401(k) plans. And remember to check with your HR office if you have questions about your employer’s options for retirement planning. And always do your own research to find the best savings solution for your future retirement income.
