Time goes in a flash. This might sound cliche, but every parent tries to warn their young children how quickly time will pass. Young people, however, have a difficult time understanding this. Yet, given the difficult financial and social circumstances of recent years, it’s become more common for young people to start planning for retirement in their 20s and 30s.
It may seem like a stretch, but it’s never too early. Here’s why you should start thinking about retirement planning today.
Why Plan for Retirement Early?
Most college students don’t see retirement as their number one priority, but a little planning goes a long way. For most 20 and 30-year-olds, planning for retirement may seem unnecessary, as it seems to be far away. Yet, it tends to catch some folks by surprise. When it comes to retirement, the earlier, the better.
So, where do you begin?
Defining Your Financial Goals
Even a little saved today can make a big difference tomorrow. Depending on your current financial situation, saving for retirement might look different for you. Before defining your goals, consider the following information:
- Your current age
- When you plan to retire
- Present expenses
- Future projected expenses
- What you can afford to set aside every month
- Savings you may already have
- Health history
- Whether you plan to get married and have a family in the immediate future
- Projected future income or tax bracket
Analyzing these factors can help you determine your approach to early retirement savings. A Birmingham financial advisor can help you assess what option might be best for you. The common options for early retirement savings include:
- Roth IRA: This is a popular choice for young people. The Roth IRA is a type of individual retirement account that allows you to grow your contributions and earnings tax-free. This is because the funds are taxed now instead of later. After 59 ½ years old, people can withdraw their funds tax-free.
- Traditional IRA or 401(k): These are also popular types of individual retirement accounts. The difference with these accounts is that there is a penalty when withdrawing money before the age of 50 ½. So a traditional IRA can be a great choice if you have other accounts to rely on before this time.
- Real Estate: Another great way to accumulate wealth for retirement is real estate. Investing in a property can be a good choice early on, given that the property is a good investment choice. If you live in your home and then sell it, you generally won’t have to pay capital gains tax. It might not be the option for everyone, but for many, it can be a smart move. For example, if you plan on staying around in one city for a long time, investing in a home might be a good idea. Investing in real estate can help you gain equity instead of paying high rental prices.
- CDs and High-Yield Savings Accounts: If you’re looking to save money but keep it as an option to access it, a CD or high-yield savings account can be another option. While people earn less interest in these investment options, they can help folks save a little money and be able to access when things are uncertain.
Benefits of Saving Early
The early bird gets the worm, or so they say. This applies to finances as well. Here are the reasons why saving early will be beneficial to you.
The amount of interest you accumulate over time compounds. This is one of the main reasons why saving early is a good idea. Compound interest refers to the exponential growth of a sum of money due to accumulating interest over a long period. The numbers may not seem like a lot, but a few years can make a few thousand dollar differences in your compound interest.
Saving Early is Easier
When you extend the timeline, saving becomes easier. If you wait until you are in your 50s to begin saving, it is going to require a lot more work and a lot more funds to make the savings count. When you are young, you might not be making that much money. Setting even a little bit aside, however, will show returns and will be a lot less painful than having to save a big chunk of your check later.
Have Questions About Retirement Planning? Contact a Trusted CPA
An experienced CPA in Birmingham can help you assess your financial situation and make a plan for the future. A financial plan can always be reassessed as situations change, but laying down the foundation is important to future success in retirement planning. Whether you plan on opening an IRA or saving money another way, explore your options with a financial professional.