When Should I Start Saving for Retirement?

Recent studies suggest that Americans are saving for retirement sooner than ever before. 

While baby boomers didn’t start socking money away until they were 35 years old on average, millennials began saving at 25. Gen Z, the youngest generation the study includes, started saving at a median age of 19.

Of course, if you’re just starting to learn about the importance of investing, you might not be sure whether you need to join the trend. No matter your age, retirement can seem like a distant feature on the horizon. Do you really need to set aside your hard-earned cash early on?

Saving for retirement earlier is often ideal, but that doesn’t mean a late start is the end of the world. Let’s take a look at how and why you should begin setting money aside as soon as possible.

When Should You Start Saving for Retirement? 

Financial experts advise investing for retirement as soon as possible. As soon as you begin working, you should consider setting up a retirement fund. Saving when you’re in your early to mid-twenties is one of the best and most reliable ways to have a sizeable nest egg when you need it decades from now.

There are a few key reasons for this, but the most important is time.

Time is the factor that allows your savings to grow. Few of us will ever manage to sock away enough in our savings accounts to retire comfortably, especially since most Americans believe they’ll need $1.25 million to do so. That’s why it’s crucial to use investments that work via compound interest.

Compound interest allows you to double your savings again and again over time. Unlike simple interest, which happens at a fixed rate of around 0.23 APY for the average U.S. savings account, compound interest lets you build interest on top of interest. In other words, you can use it to turn a tiny investment into a small fortune.

Of course, this only works if you have enough time! The longer you leave your money alone to grow, the more compound interest you’ll receive. This is why saving early, which gives your initial investments several decades to multiply, is always better than delaying.

Another factor worth mentioning is your employer’s 401(k) matching, if applicable. Through this employee benefit, your employer will match whatever you contribute to your retirement plan up to a certain limit. If you fail to take advantage of this offer throughout your early working years, you may leave thousands of dollars on the table!

What Happens if You Start Later?

Let’s say you’re well past your twenties, and for whatever reason, you haven’t started to invest. Even if you begin investing now, your money won’t have several decades to compound before you need it in retirement. Should you be worried?

Don’t panic: you’re in good company. Many people find that a late start is unavoidable. However, a few smart moves can help you catch up.

Because you have less time, it’s important to start putting as much cash as you can into your retirement accounts. One advantage of starting when you’re older is that you likely make more money. Thus, you can set more money aside than you could in your early twenties.

There’s no getting around the fact that you’ll need to set aside more cash. Where a 25-year-old might need to save around $500 each month to hit a retirement goal of $1.7 million, a 35-year-old would need around $750 to reach the same goal.

That doesn’t mean these larger savings are impossible. Where necessary, go over your budget and find ways to free up more cash or earn more money. If you need additional assistance, consider reaching out to a financial advisor who can offer investment advice, money-saving tips, and budgeting help.

It can also be helpful to create a realistic retirement savings goal. Figure out how much savings you need and decide how you’ll get there. Don’t forget to remove any additional income from the amount you’ll need, including a pension, rental property income, and Social Security income.

How Compound Investing Works Based on Your Starting Age and a 6% Annual Return

When you start saving, your savings rate, and the power of compound interest matter. According to the U.S. Census Bureau 2020 data, the median household annual income was $67,521. In the table below, we’ll explore what that income looks like if you start saving at certain ages and at certain rates with the compound interest over that time applied. We will also be assuming that the target retirement age is 65.

As you can see, the earlier you start saving for retirement, the better off you will be. However, if you’re getting a late start, there is still time to catch up. These savings are in addition to Social Security income.

How Much Should You Save?

No matter how old you are when you begin investing, you’ll probably ask yourself a common question: how much should you save? 

The best way to figure this out is to look at your retirement savings goal. Using an online calculator can help you break your goal down into monthly investments based on the amount of time you have left until retirement.

However, another good rule of thumb is to put between 10-15% of your gross income toward your retirement. This is easier if you earn a fixed salary, though hourly workers can calculate this amount from paycheck to paycheck. If you’ve started saving much closer to retirement, of course, you may need to increase that percentage. 

This rule of thumb is also great because it emphasizes an important personal finance strategy: always pay yourself first. Before you start to spend on living expenses or discretionary purchases, put money toward your retirement.

Last, but not least, if you can’t save this amount, it doesn’t mean you shouldn’t save at all! Those who can’t save hundreds of dollars should still save what they can, even when that figure is only $20 a month. Because compound interest is on your side, even a small amount of money ensures that you won’t have to work as hard to catch up in the future.

Invest in Your Future Today

The best age to start saving for retirement may be in your early working years, but the second-best time is now. No matter how old you are, it’s never too late to begin investing in your future. With the right strategies, you can ensure that your nest egg has grown by the time you’re ready to leave the workforce!

As you work to secure your finances, don’t forget that we’re here to help. Be sure to take a look at our other finance guides and subscribe to our weekly newsletter for more tips.