Saving for retirement can be a challenge, particularly when you're on the younger side and your wages may not be robust. Throw in the fact that many people graduate college saddled with debt, and it's no wonder funding a retirement plan is tricky for many 20-somethings.
Data from Northwestern Mutual finds that the average age for workers today to start funding a retirement plan is 31. While that's not terribly late to start retirement savings, waiting until your 30s to contribute to an IRA or 401(k) could mean missing out on years of investment gains.
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It's important to start as early as possible
When you're new to the workforce, it can be difficult to carve out money for retirement savings. But many people graduate college at 21 or 22, and waiting until age 31 to begin funding a retirement account means losing out on a decade's worth of contributions -- and a decade of potential gains.
Let's say you're aiming to retire at age 67, which is the full retirement age (FRA) for Social Security for people born in 1960 or later. If you start funding a retirement account with $300 a month at age 31, by 67, you could have a balance of about $674,000, assuming an 8% average annual return (which is a bit below the stock market's average).
Considering that the average retirement savings balance among all workers today is $88,400, as per Northwestern Mutual, and the average balance among baby boomers is $120,300, $674,000 is a pretty decent sum of money to have on hand for your senior years.
But watch what happens if you start saving that $300 a month at age 22 instead of 31. Assuming the same retirement age of 67 and the same 8% return, you could end up with a savings balance of about $1.39 million. To put it another way, that extra nine years of savings could leave you with more than twice as large a nest egg by retirement age.
It's worth making the effort
It may not be reasonable to max out your IRA or 401(k) in your early 20s when you're brand new to the labor force and may not be earning the most generous salary. But do try to make a point to save something for retirement at that point in your life. If you can't swing a few hundred dollars a month, save a few hundred dollars a year.
The sooner you get money into your retirement account, the sooner it can be invested. And those extra years of gains could have a huge impact on your total nest egg.
Keep in mind that if your employer offers a 401(k), you may be entitled to free money in the form of a company match. So that's a good way to make a nice dent in your retirement savings at a young age.
Remember, there's always the gig economy for extra income. Even if you're only carving out a few hours of added work per month, any extra income you earn is money you can set aside for retirement. And your future self might really thank you for making that effort.
