Should You Save For Retirement At a Young Age?

This is a question that usually bugs younger people when they start their first “real” job.  Most larger companies offer some kind of 401k plan, and other smaller companies will help you open an IRA.  The attraction to contributing to a 401k is that some companies will match your contribution up to a certain amount.  It truly is one of the only times in your life where a company will give you FREE money.  The only catch is that sometimes they make you stay with that company for certain amount of time before the money is fully vested.  This means that you will have to work at the company for so many years before you can keep all of the matched money.  The other side to this question is that most young people could use as much of their paycheck as they can get.  We do not have a lot of room to be thinking about 40 years down the road.  I do not have a great answer to this question, because I believe it depends on your situation.

Consider this:  if you started contributing to $100 a month to your retirement account at the age of 25, and you were going to retire at the age of 60, then your account would reach $379,000.  If you started saving for retirement at the age of 35 with the same contribution, then you would have just $132,000.  The point is obvious.  If you start saving NOW, compound interest becomes your best friend when it comes to investing money.  This is not even factoring in the match contribution that a company may make.

However, you may be a in situation where a $100 more per month would help you get out of debt faster or save up for a bigger purchase down the road.  This might make more sense if you are debating whether or not to contribute to your retirement account.  My take on this dilemma is that I think one should do whatever he or she needs to do put themselves in a sitaution to contribute large chunks of cash to their retirement account down the road.  If NOT contributing now will set you up to contribute $500 – $1000 a month to retirement, then wait to invest.  If there is nothing stopping you from investing now and your company will do a 401k match, then NEVER pass up the free money.

Remember:  Always contribute to a 401k with a company match first, then use a Roth IRA as a secondary account.  If you are self-employed, do the SEP IRA.  If your company does not match your contributions, then go with the ROTH IRA.

  • Jon Postal

    I started putting money into an retirement account when I was about 20 because of the immediate tax savings (If you are not familiar with Canadian tax law…you can deduct the amount contributed to a registered retirement savings plan from your gross income resulting in a generouse tax return at year end.)
    When I was 23 I emptied my retirement account to by a home, and I have 15 years to pay back the amount I withdrew from the retirement account. I was earning next to nothing on this account (4%), and the local real estate market was climbing fast so it made sense for me to take advantage of the tax system and get into real estate.
    The home I bought is up in value by about 36% in just over a year. Even though my retirement fund is now at $0 my net worth is substancaily more than it would have otherwise been, and I am firmly established in the real estate game.
    As you were saying, each person needs to evaluate their current situation to see what makes the most sense.

    Jon Postal

  • Bruce

    I started my 403(b) in August 2010 and it is the best savings tool ever. I contribute 6% and my company matches that with 7%. Starting at 25 year old feels great, but now it is important to remain consistent throughout the next 35 years. My money is fully vested the moment it goes into my account, so there is no concern of having to be here a certain amount of time to receive that money. Thanks for the great post.

  • jay

    is that even possible? what about if you’re self-employed..and residential real estate the way it is now.

  • Cat Ng

    Good advice.. I’m 29 and have already started! Here is what I’m doing:

    1. I now put away the maximum amount in my 401K (5% for me) that my employer will pay into the plan as a match. It is free money and dumb not to do it. It was basically a raise I gave myself.

    2. After calculating my expenses, I found that driving was my biggest expense. I fixed that by buying a fuel efficient car thats durable (Honda Civic), finding an affordable insurance policy for it ($25/month from 4AutoInsuranceQuote, yay!), and using apps like Gasbudy/Waze to save money at the tank. I cut my transportation costs in half!

    3.I cut way back on eating out. I am having a year of putting away money hard, and food was a huge portion of my budget. I save about an extra $100 a week now, and eat healthier and better. Ditto for others if you spend a lot of money in bars.

    4. I need life insurance to protect my 2 daughters, but I ditched a $275 a month whole life policy for a term policy and now I only spend $25 a month. I save the difference to my Roth IRA. If you are unfamiliar with this and want to learn more watch shows or read articles from Suzey Orman or Dave Ramsey sometime. They are huge proponents.

    There really were no two ways about it. If I plan on having a full savings account (getting there) and a comfortable retirement (I will) I have to make good decisions with my money.