If you’re going to invest your money, you need to think about how you’ll enjoy it later. Retirement is an all-or-nothing proposition. If you save nothing, or a fraction of nothing, you’ll be $200,000 in the hole at age 65. Better to start saving early and save a little each year, rather than wait until you’re older, when you’re earning a lower or stagnant income, and you’ll have less money at your disposal.
A new job can be a great opportunity for a student to save money, but it can also be a great time to start neglecting retirement goals. This is because many new positions do not offer benefits, and employers often encourage employees to start saving money for retirement immediately. What’s more, employees often end up with both a new employer and a new job, which means that they also need to learn how to invest and manage their money.
So you’ve just graduated from college and been hired for your first adult job. Congratulations! Over the next few months, you’ll have to learn a lot of complicated things, like. B. what your role will be, what tasks it will entail, and even how to master all the intricacies of working in a new environment. Many people sitting in front of the big stack of papers HR has them sign on their first day at work are faced with something they probably never thought about: their retirement. I remember at my first job, I was given the enrollment forms for the company pension plan. I was so confused and had so many questions. ….
- Do I really have to sign up for this?
- I’m only 23 years old. Why should I worry about retirement at this age if I’m going to end up buying a reliable car and a house anyway?
- How does this pension scheme work? Won’t that come out of my paycheck?
… And much more. Curious by nature, I decided to learn and absorb as much as I could about retirement planning and personal finance. I read book after book and blog post after blog post. What have I learned? Retirement planning is one of the most underrated ways to build wealth over time. The more effort you put in at the beginning, the more likely you are to live very comfortably as an adult. In this post, I’ll cover the importance of saving and investing for retirement, starting with your first job. We will also look at how you can align your long-term financial goals with other major life events that are likely to occur in the next 5 to 10 years.
Why is it important to invest for retirement?
Before we talk about the importance of retirement savings, it’s helpful to understand what a retirement plan does for you.
What is the purpose of the pension plan?
Your retirement plan is nothing more than a money fund that you will use to support yourself after you retire. You often hear people call it a rainy day snack. The typical structure of most retirement planning scenarios is that you work for about 30 years and set aside a certain percentage of each salary. At some point, when you are older and finally able to retire, you can replace your earned income with the money you have saved by taking a small amount out of your piggy bank each year. It’s a little different than the way your parents and grandparents prepared for retirement. In the past, most American workers could work for about 30 years and receive a so-called pension when they retired. A pension is a lifetime stream of payments from your employer for many years of work and service. Annuities were the dominant form of retirement plan until about the 1980s, when companies began to abandon them in favor of newer plans like the 401k. This has completely changed the landscape of retirement planning and shifted the burden of building up a retirement reserve from the employer to the employee. As it stands, everything you personally save for retirement, with the exception of Social Security, is all you will ever have. This is an important point to take seriously. According to Northwestern Mutual’s Planning & Progress survey, as many as 15% of Americans have no retirement savings at all. This means they must either work indefinitely or rely on public assistance to make ends meet.
How does retirement planning work?
There are many ways to plan for a successful retirement, but the most popular is the so-called 4% rule. The 4% rule is a study that shows that a retiree can withdraw up to 4% of their apple each year (adjusted for inflation) for at least the next 30 years without fear of running out of money. Here’s an example:
- If you increase your piggy bank to $1,000,000.
- The 4% rule says you can safely withdraw 4% or $40,000 per year.
When I learned about the 4% rule, something clicked. This is a simple yardstick that you can use to easily determine how much money you should have in your roll call. And the relationship was clear: The more money you accumulate in your roll call, the more income you can earn during retirement. Then the question arises: How can you maximize your growth?
Investing helps your savings grow
Most retirement planning scenarios are based on two major asset classes: Stocks and bonds. After decades of investing and watching my apple grow, I advise everyone to invest in stocks because the returns are worth it. In the long term, the stock offers the best growth opportunities. Just look at these historical figures:
- If you invested $100 in a stock in 1928, it will be worth $592,868.15 in 2020.
- If you invested $100 in government bonds in 1928, they will only be worth $8,920.90 in 2020.
Quite a difference, isn’t it? Of course, it’s important to remember this: Stocks are more volatile, their value fluctuates; sometimes they even lose money in a few years. Therefore, financial advisors often recommend having both types of assets in your portfolio to best combine growth and stability. The market’s ability to generate such profits is based on a phenomenon known as compound interest. Compound interest is when money grows beyond the money invested and the income earned. In fact, after a number of years, your income will begin to generate more money than the contributions you have made. In this way, a person can build up a savings pot that is many times larger than the amount he has set aside for his pension. For example, suppose you invest $500 in your egg every month for the next 30 years. If you invest it in a stock with an average annual return of 10%, how much do you get? Answer: $986,964.14 Source: SEC interest rate calculator Notice something important:
- Their contributions amounted to only $180,000 for the entire 30 years.
- The remaining $806,964.14 is due to compound interest growth.
As you can see, this is why it is important to invest somewhat aggressively. Your contribution is more likely to be multiplied many times over. This will allow you to earn a higher income in retirement. However, another important conclusion can be drawn from this graph…..
Why it is important to start saving for retirement early
One of the biggest financial mistakes a young professional can make is thinking they have a few more years before they need to start saving seriously for retirement. In fact, nothing could be further from the truth. When I discovered compound interest, I immediately noticed that the total balance always increases exponentially as you move to the right (the red line in the chart above). See how much more money you have between the ages of 28 and 30. In other words: The longer you worked, the more this line increased. Another way to do this is to start counting as soon as possible. What if you didn’t wait to make your first retirement contributions at age 25 or even 30, but started from day one, perhaps as early as age 22 or 23. This is equivalent to working an extra year or two. Another advantage of starting your retirement savings as early as possible is that you can literally have the same (or even a bigger) nest egg as your peers with less money and effort. I remember coming across an example that illustrated this point, comparing two workers who started saving at different ages. Here’s a similar example from Vanguard:
- Suppose you start saving at age 25 and you dutifully save $10,000 a year, including contributions from your employer. But at 40, for whatever reason, you have to stop saving.
- Your friend begins saving at age 35 and saves the same $10,000 per year for the next 30 years until you both retire at age 65.
Who will have the most money at 65?
- You’ll have $1,058,912.
- Your friend will have $838,019.
How is this possible? You haven’t saved for 25 years, while your friend has all that time! The answer is to start taking advantage of the effect of compound interest as soon as possible. If you start just 10 years earlier than your friend, you will accumulate more capital on which compound interest will accrue. As you can see, at age 40, it doesn’t matter if you stop saving for retirement altogether. While your peers are contributing $10,000 a year to ensure they have enough savings at age 65, you can enjoy your money and still have a big apple to eat!
Why some people wait to save for retirement
You would think that with all the examples and studies showing how easy it is to build wealth, almost everyone would go down that road. But unfortunately, this is not the case. …. According to the Pension Research Center study, the median pension balance for each age group is as follows:
- 35-44 years = $37,000.
- 45-54 years = $80,000.
- 55-64 years = 104,000
These figures are worrying, especially in the latter age group, which is just a few years away from retirement. With the 4% rule, $104,000 in savings would yield only $4,400 in retirement income. Wow! Many people I know who have retired under these circumstances are waiting for Social Security payments or have to work part time to supplement their income. Either way, it’s not exactly the luxury most people imagine (or hope for) when they retire. So why is this happening? Why don’t people focus more on retirement savings and taking advantage of the effect of compound interest? There are several reasons to do so….
- Short-term objectives By the time most people get their first big career-oriented job, they’re in their twenties. I remember there being many other great competitive buys at that age: Marriage, house, second car, kids, etc. Navient, a student loan provider, conducted a survey of 3,000 adults between the ages of 22 and 35 and found that 4 in 10 respondents felt they could confidently delay retirement and focus on these more pressing goals.
- Student loans: More and more young people need to use student loans to get a college degree before they can get their first big job. This leads to financial difficulties. Once they start working, they must begin repaying these loans, which currently average $393 per month. That leaves very little for other expenses, let alone retirement.
- No education: No matter how much good information is available, it never reaches the people who need it most. While it is so important to develop good personal finance habits, I have noticed that very few high schools and colleges offer courses on this topic. Unfortunately, when many young people first move or get a significant job after graduation, they are faced with these kinds of major financial problems for the first time.
Whatever the cause, the consequences are undeniable. The longer you wait to save for retirement, the more you miss out on compound interest. This, in turn, reduces your chances of growing your wealth to its full potential.
How do you invest for your pension?
If you just started your first job and want to start saving for retirement, there are several good options to choose from:
A 401k is the retirement plan offered by most American employers. It gets its name from the section of the IRS tax code that describes it. 401k plans are what are called tax deferred plans. This is because when you make contributions to the plan from your salary, you may not pay taxes on that income. Your 401k contributions are allocated to investments you choose from pre-selected options. This money grows tax-free until you need it sometime in the future for retirement. Once you withdraw your money, you begin to pay the taxes you owe. If you retire after age 59 1/2, you can withdraw money from your 401k without penalty. If you withdraw it before that date, you will have to pay tax and a 10% penalty. A 401k plan is not like a retirement plan. The money you put in and the earnings it brings in are yours and will always be yours. You can take it with you if you change jobs or transfer it to other types of retirement plans. In addition to the tax deferral, another major benefit of 401k plans is that employers often adjust their contributions. The matching contribution can be 25 cents, 50 cents or even a dollar for a dollar. It’s like getting free money! I’ve been using the reduced contributions for almost two decades now, and currently they add almost $4,000 to my 401k each year. In retrospect, the contributions were at least a fraction of six figures from the nest egg I have today. Depending on where you work, you may have a 403b or 457 plan instead of a 401k. These are other types of retirement accounts that are similar to a 401k, but have some subtle differences.
An IRA (Individual Retirement Account) is another commonly used tax-deferred retirement plan. It is something you create yourself at a financial institution and has nothing to do with your employer. In terms of taxes, you can choose between two types of IRAs:
- Traditional:Traditional IRAs work the same way as 401ks. You can make contributions tax-deferred, let them grow tax-free for decades, and then pay taxes when you retire after age 59 1/2.
- Mouth: A Roth IRA works the opposite of a traditional IRA. In the case of Roth, you now pay taxes when you contribute. The money grows tax-free and can be withdrawn tax-free for retirement after age 59 1/2.
The big difference between an IRA and a 401k is the contribution limits. While you can contribute up to $19,500 to a 401k, you can only contribute $6,000 to an IRA (as of 2021). Since IRAs are also set up outside your employer, there is no match. The only money that goes into your IRA is the money you set aside there. Most American workers can contribute to both a 401k and an IRA. Over the years, I have made the most of both of our programs to ensure that each year I receive the maximum amount of taxable savings that the IRS allows me.
If you work for an employer that doesn’t offer a retirement plan and you want to save more than your IRA allows, you still have the option of putting your money in a taxable brokerage account. It can be a large financial provider like Vanguard, Fidelity, etc. While you may not have the same tax advantages, there are some benefits to building a modest stock portfolio. Common stocks are taxed on capital gains and dividends, which are generally lower than what you pay on earned income. While you pay 22% to 28% tax on your earned income, your tax on capital gains and dividends can be as low as 0% to 15%. A simple, pre-constructed stock portfolio to invest in would be something like Dogs of the Dow. This is a short list of the 10 dividend stocks with the highest dividends in the Dow Jones Industrial Average. Because these are large, well-known companies with strong financial performance that also pay dividends, investors achieve slightly higher returns than the S&P 500 Index fund in some years.
How do I divide my salary?
Maybe that’s what you think: These tips for building wealth with retirement accounts sound great! But then again, I’m only in my early twenties. I still have to think about the house, marriage, student loans, etc. Hey, I got it! Not too long ago, I found myself in the same situation, trying to balance the immediate needs of my new family with our long-term goals, such as retirement. What has helped me is that I’ve started budgeting and making sure I always have something for the important things (even if it’s very little). A simple way to budget this way was proposed by Senator Elizabeth Warren. In his book All Your Worth:. The Ultimate Lifetime Money Plan, he proposed what became known as the 50/30/20 budget rule. This is how it works:
- 50% go to question: Needs are expenses in your life that you cannot avoid because they are necessary for survival: Rent/household money, meals, car, utilities, insurance, etc. This category also includes all minimum debt payments.
- 30 percent go to Wanted: Wishes are things you love, but could do without if things were tight. This includes expenses such as vacations, shopping, eating out, streaming services, etc.
- 20% goes to savings:Savings is what you put aside for the future. For example, it could be a pension fund, an emergency fund or even a future goal. For example, a down payment on a new home. This group also includes all payments on debt that exceed the minimum amount required (starting with those on which the highest interest rate is charged first).
In the savings category, most financial advisors recommend putting 10-15% of your gross income into your retirement plan. If you put in less than this amount, you will probably have to work for more than 30 years to reach your goal. I always recommend contributing at least as much to your 401k plan as necessary to receive full compensation from your employer. For example, if your employer contributes up to 5% of your salary, make sure you contribute at least 5% to your 401k plan. Otherwise, you’re just leaving free money on the table. When I worked as a manager, I often saw some employees not taking advantage of this benefit (or not paying anything at all). It was driving me crazy! I took them aside and explained to them that they were losing thousands of dollars a year. I don’t want the same thing to happen to you!
How do I get a good financial record?
One of the hardest things you’ll face when starting a new job is your inflated expectations. I remember starting out as an entry-level employee and working with people 5 to 15 years older than me. They had nice houses, nice cars, and constantly talked about the extravagant places they would go on vacation. The problem with this transition is that in the years leading up to my first job, I was always surrounded by peers who were about the same age and at the same place in life as me. For example, if you’re in college, everyone has a low income and you can barely make ends meet while focusing on your studies. But at your first job, that’s no longer the case. But your colleagues may be people who have worked for decades and have higher incomes or savings than you. This means that they can lead a lifestyle that you cannot yet afford. It’s a hard lesson to learn, but a necessary one. You have to keep things in perspective and remember that you’re just getting started. Whatever you want will come with time. But it will take hard work and sacrifice. This is where budgeting will be particularly useful. If you stick to a simple ratio, like. B. the 50/30/20 rule (or something similar), you can be sure that you are paying attention to each of your goals. It is important that you do not neglect any of them and gradually try to get what you want. Believe me, I remember when I saw my first paycheck, I wondered how I could afford a mortgage or a vacation for my family. But in ten years, I worked hard and was able to triple my income. Each year the amount has increased and we have been able to enjoy more and more of the luxuries we dreamed of at the age of 20. We just had to be patient and earn our way to them.
Setting money aside for retirement after you get your first job as an adult may seem like something you put off. But once you’ve done the math, you know that contributing to your piggy bank from day one is the right time. The main advantage of a retirement plan is that it is a relatively easy way to build wealth. By investing and taking advantage of the effect of compound interest, you can multiply your wealth. The sooner you start, the better for you. Not only will you be able to achieve your goal with fewer contributions, but you will also ensure that your egg has the best chance of experiencing maximum and optimal growth. That’s exactly what you want, because you’ll be using that money for the rest of your life. You can easily start saving for retirement through your 401k, your IRA, or both. If your employer does not provide one, you can also invest in a taxable brokerage account using the lower tax brackets for capital gains and dividends. Despite these benefits, many young people choose not to save for retirement in favor of other priorities. By sticking to such a budget, usually 50/30/20, you can ensure that your money is used for all the important parts of your financial life. Above all, remember that this is your first job and you need to be patient, even if other desires seem more pressing than the possibility of retirement. After a few years of hard work and sticking to your budget, everything will balance out. And one day, when you’re nearing retirement and you see that you’re all the way to success, you’ll be grateful that you took the opportunity to build your wealth when you did.
Frequently Asked Questions
How much should I contribute to my 401k at my first job?
If you’re not sure how much to contribute to your 401k plan, it’s probably because you don’t fully understand how the plan works and how the money is invested. After reading this guide on how much to contribute to a 401k at your first job, you’ll know exactly how much to contribute and how it’s invested. A 401k is a type of account that is often sponsored by an employer. Most employers offer a 401k plan, and the majority of these plans are designed to help with saving for retirement. They are also designed to help you save money for a specific retirement date. The 401k plan is essentially a bank account. As a bank account, the 401k works in a way that allows you to save a portion of your paycheck into it. This money is then invested in a number of different ways, depending on the plan your employer has. There are different places that you can invest your money, which will determine the amount of interest you will earn on the money that you set aside in the plan.
What is a good age to start saving for retirement?
If you’re starting your first job, you probably want to make sure you set aside enough money to have a comfortable retirement. But how can you tell if your employer is offering the correct amount of money to start saving? The answer may surprise you. When you make the first big pay check in your career, there are lots of things to consider. The first thing that comes to mind is what you want to do with the money that you have earned. If you are like most people, you want to spend the money on fun things. This is a great idea, and it is wise to get your money on the cheap. The problem with this is that this cheap fun may not last – you may feel like you can’t afford nice things. The truth is that we can afford nice things and we don’t have to spend all of our money on cheap things.
Why is it important to start thinking about retirement when you get your first job?
Should you start saving for retirement from day one, or should you wait until you have a few years in the professional world under your belt? Chances are, in our modern society, you are not going to have a lot of time to save for retirement. Therefore, you need to start planning for retirement a long time ago (like when you are in your 20s, or even earlier) so that you can have a dignified retirement without having to work in your retirement years. As you start your career, it may seem like the ideal time to start investing for your future. But many people don’t start saving for retirement until they are already at the office. There are a few good reasons for waiting. For one, if you are only ten years away from retirement, it may not be worth the bother to save for retirement, since you are unlikely to have enough money saved up to retire comfortably before you actually retire.
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