4 Reasons Young Adults Save for Retirement/ June 6th, 2016
Twenty-somethings everywhere are graduating college, starting careers, and building a life of their own. In theory, young professionals are making the least amount of money in their careers. This comes with both challenges and opportunities.
The National Association of Colleges and Employers reports that among those earning bachelor's degrees in 2015, the average salary is between $63,000 (engineering) and $45,000 (humanities), depending on the discipline.
Assuming an average starting salary of about $54,000, after taxes and other deductions this number gets low. Yet this still is the best time to save for retirement.
Whether it’s $25 per month or $17,500 per year, it’s important to save while you’re young to maximize your future net worth. These are the years for having fun and enjoying your youth, but saving money should always be a priority. Here's why:
1. You have fewer financial obligations
Even with student debt, unless you have a mortgage, spouse, and children, you probably can afford to pay at least a little bit into your retirement account. Even 1% of a $45,000 salary ($450 per year), is worth it:
- If you’re investing in an employer-sponsored 401(K), that $450 is deducted before taxes.
- You can take advantage of your employer’s match, which means free money if you’re fully vested.
2. Time is on your side
The retirement age for millennials is 67. That means if you graduate college at 22 and start working right away, you have 45 years in the workforce which means you have 45 years to save for retirement.
How much do you want to have saved for retirement? Let’s say $2 million. That means that without compounding interest, employer match, or investment gains, you would need to save $44,000 per year. Not possible.
Fortunately, you have the advantage of compounding interest, and hopefully employer matches and investment gains. Starting in your twenties means more in interest and matches earned over time than starting in your thirties—in fact, a person who saves for only 10 years starting in her twenties can earn more than someone who saves for 30 years but starts later in life.
3. You already know how to live like a poor college student
You know how to make a whole meal out of a few random ingredients and get by on pennies. Don’t give up that poor college student lifestyle in your early twenties, even if it seems like a good idea to splurge on new clothes and restaurants.
Instead—invest in yourself. It’s better (and easier) to live like you’re poor now than in retirement. Who knows? You might be able to retire in your 30s!
4. You build solid money habits while you're young
Develop good money habits and get stuck in your ways as you grow older. Otherwise, by blowing money on things you don’t need, you’re setting yourself up to just spend more as you earn more.
You can be sure that Warren Buffett doesn’t blow money on new clothes or the latest and greatest tech gadgets!