If you start saving cash while you’re young, you’ll be rewarded abundantly in the future, says Bankrate, a financial consultant that offers recommendations to ensure peace of mind in your retirement.
“The irony of retirement savings is that you need to start young. To fully enjoy the power of compound interest requires maximizing the years you spend saving,” she says.
On its online site, the company illustrates an example: If you start saving $5,000 a year at age 22, and continue to save that amount until you reach age 67, with an annual return of 6 percent, you’ll end up with $1.13 million by the time you reach full retirement age.
But if you start saving a decade later, and you’re only 35 years old until you retire, you’ll have to save nearly twice as much each year to end up with the same amount when you reach age 67.
The first recommendation to start saving for retirement in your 20s is to build a small emergency fund, equivalent to six months of essential expenses stored in a high-yield savings account. “When you’re 20, you have a long investment horizon. That means you can handle the ups and downs of the market,” he says.
That can be a pretty daunting task for someone just starting their career, but the goal is that by the end of their 20s, they’ll have in their retirement accounts what they earn in a year. The idea, she clarifies, is not to arrive at that amount once and for all, but to start by allocating around $3,500 and starting from there.
The ideal, he says, is to save at least 10 percent of the payment, including any compensation from the employer, in a tax-advantaged retirement account. For this purpose, having an emergency fund will prevent you from going into the retirement account if you ever need cash, which could cripple your ability to have compound interest.
According to a 2017 analysis by the Federal Reserve, more than three-quarters of full-time jobs offer a retirement benefit, and new workers can automatically enroll in one, notes Bankrate.
However, some of these plans may be set up to save a smaller portion of your salary than recommended. If so, increase the contribution or design an automatic escalation to contribute more each year, he says.
With information courtesy of Negocios Now