Is it Too Early to Start Thinking about Retirement?

When you’re in still in college, saving for retirement is probably the last thing on your to-do list. After all, your retirement is probably 40 or so years away, while you’re focused on more immediate concerns such as schoolwork, a job and day-to-day family responsibilities. But it’s never too early to start saving for those golden years, and the sooner you start, the better.

Why now? Because time is on your side. By saving even a few dollars each paycheck, you can take advantage of the power of compounding interest, in which interest earnings are added to the amount you save (principal) so that the added interest also earns interest from then on. So the earlier you start saving, the more your savings can grow.

Confused? Check out the example below to see how starting early can really pay off. “Joe” started saving $500 a month beginning at age 30 and continued for 10 years. “Bob,” on the other hand, held off until age 40 to begin saving that same amount each month, but saves for 15 years. Even so, “Joe” ends up with almost 9 percent more money at age 65 even though he saved less ($60,000 versus $90,000) and for five fewer years. That’s because he had 10 more years of compounding interest working in his favor.

Note: Assumes 4% average interest rate

If you’re ready to start stashing away some money, you’re probably wondering where to put it. Tax-favored retirement accounts such as individual retirement accounts (IRAs) and 401(k)s are the best places to save for retirement. There are different types of plans with many different features, but most of them allow you to defer taxes on the money you save and the interest you earn within the account. If you are working (or plan to after graduation) and your employer offers a retirement savings plan, be sure to take full advantage when you become eligible since many will match a portion of your contributions. For more information, the U.S. Department of Labor has a nice booklet that explains the various types of retirement plans.

If you are just barely making ends meet or don’t know how to find ways to save, check out this article on how to plug the small leaks and learn to live below your means.

When it comes to saving for your retirement, it’s never too early to start saving, so start securing your financial future today.

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