Before you reach retirement age, you will want to have a good nest egg stashed away, but the problem is that if you do not start saving money for retirement early enough, it becomes harder and harder to achieve. Plus, while we can tend to put this off until we have a bigger income, we forget that we will also more likely have bigger expenses too such as a mortgage and family.
Having time on your side is the biggest advantage that you can have when it comes to saving money for retirement. Here are more of the advantages that you can get from starting saving money for retirement in your 20s.
What Are Your Goals?
Before you get started saving for your retirement, you need to know what your goals are for the long term. These should be realistic. If you are unsure of what is going to be best for you, it may be worth hiring a financial planner to help. You should consider:
· How old you are now
· What age do you want to retire
· What are your income sources
· What are your expenses
· How much can you put into retirement savings
· Where do you want to live after you retire
· What savings accounts will you have
The Impact of Compound Interest
The top reason to start saving for your retirement in your twenties is simple – the impact of compound interest. Not familiar with compound interest? This is money that grows over time with interest. The more time you have to let it grow, the more money you will receive.
An easy example to understand would be an investment of £1000. If this earned 2% in one year, at the end of the year you would have £1020. The major gain with compound interest is then that in this second year, you would receive 2% interest on £1020, which is £20.40.
Although this does not seem like much, over the years this becomes larger and larger to keep for your retirement. What’s more, if you were to invest this money in the stock market that grows, say, by around 6% to 8%, you can see how much compound interest would benefit your savings.
Why You Should Start Today
Why keep putting off starting tomorrow when you can ahead and start saving today? If you are earning a salary each month, you should be taking advantage of employer contributions for an extra boost to your savings.
This is one of the biggest benefits of being an employee that you would be mad to miss out on. Using a company pension scheme means the money will be taken out before you even notice it is gone. Plus, when your employer matches your contributions this is a lot of free money that you could be missing out on.
Many will argue that they can simply put more aside as they get older, but what is the impact of doing this? If you were to, for example, invest £100 a month over the next 40 years at an interest rate of 7%, at the end, you would have a sum of over £250,000. When only less than £50,000 of this is your own money and over £200,000 in interest, this shows you what putting a small amount away over a long period of time can do.
On the other hand, what if you were to just make larger contributions to your pension later in life and forget about making them today? Well, if you were to start investing 30 years later and invested £1000 a month for 10 years at the same 7%, you would get a grand total of nearly £174,000 with interest only making up just over £50,000 of this pot.
These calculations do not consider inflation, but you can see exactly why saving money for retirement in your 20s is the right thing to do vs holding off and saving later in life.
Your Investment Portfolio
When you are starting to save for retirement, you also need to consider how you are going to split up what is called your investment portfolio.
In this portfolio, you will want to try and achieve the highest returns possible, but at a level where you are comfortable with the risk. When we are looking at long-term financial goals such as retirement, it is best to look at assets that are going to provide the biggest opportunities for growth. When investing, you should be aware of:
· Market Risk – If you want to make the biggest returns on growth for your investments, this usually means choosing an option such as stocks and shares. However, it is important to know that while they have the biggest growth, they also carry the most risk.
· Your Risk Tolerance – Does the thought of rising and falling stock prices cause you stress? Or are you happy to ride these waves? Your risk tolerance has to be factored into your investing to ensure you are completely comfortable with it. If you are unsure of investing in high performing stocks, try to increase your knowledge on these topics by learning more about the various options available to you and their historical performance.
· Retirement Age – When you are planning to invest, you should also take into consideration what age you want to retire. Why? This helps when calculating how much time you would need to regain market losses. When you are in your twenties, you will have plenty of time to recover from market losses were you to invest in stocks and shares that were more volatile.
If this is something that you are not comfortable with, then it is definitely best to look at hiring a professional who can help you manage your money and make it work best for you.
A Simple Savings Account
Everyone should still have money set aside in a savings account for their retirement. In the UK, the easiest and best way to do this is through a Cash ISA. Although the interest rates on these accounts are not great, they offer a simple way to put your cash aside tax free.
At the moment, the total amount you can save in an ISA is £20,000 per year and this can be split in a cash ISA and stocks and shares ISA. Savings accounts are also the best option for short term expenses that you are saving for such as a deposit on a home, holiday or car. These accounts are much more easily accessible if you need to access them quickly.
Start Saving Today
As you can see, there are huge benefits in starting to save money for retirement today, rather than waiting until tomorrow. Starting early allows you to put away less money over the course of the next thirty to forty years and you can take advantage of having compound interest on your side.