If you're in your early-to mid-20s or even in your early 30s, you might not be too concerned about retirement planning. After all, you've got at least 30 more years before you can realistically retire. But financial-planning experts repeatedly insist that you should start retirement planning as soon as possible, preferably with your first job after you're out of school.
The earlier you start funding retirement plans, the better off you'll be. As a young person, you have two important things on your side: time and the power of compound interest. Time is a no-brainer. Let's say you start setting aside $3,000 a year for retirement starting at age 25, and a colleague does the same but starts at age 35. By the time you're 35, you'll already have saved $30,000 of your own money toward your retirement, while your colleague is just getting started. If you both fund your retirement plans at the same rate, you'll always be at least $30,000 ahead. And that's not even factoring in interest. Compound interest is where the real magic of retirement accounts kicks in. In a retirement fund, interest is calculated on the principal balance, which includes not only your contributions, but any interest that you've already earned. This means that your interest earns interest! Over time, this makes a huge difference in the amount of money you'll have in your retirement fund when your working days are over. Let's go with our earlier scenario, where you start saving at age 25 and save $30,000 over 10 years. Now, let's assume you're getting an average of an 8 percent annual return on your investment. If, at age 35, you quit funding your retirement account entirely, the compound interest on your initial $30,000 investment will grow to a whopping $472,000 by the time you're 65--and that's without you contributing a penny to your retirement plans after age 35. And your colleague who waited until age 35 to start saving? Even if he contributes $3,000 a year for 30 years at the same 8 percent return, he'll only have amassed $367,000 by the time he's 65. The earlier you get started, the more compound interest can benefit you.
As you can see from the above examples, the earlier you start retirement planning, the better. Starting young means you can take advantage of the full power of compound interest, which also means that you can contribute less of your income over time and still come out ahead. If you're in your first job and money is tight, just start with a small amount, like 3 to 5 percent of each paycheck. That will at least get you started with a retirement plan and allow you to take maximum advantage of compound interest. Increase your contributions as you progress in your career and start earning raises and bonuses. One final hint: If your employer offers a 401(k) retirement plan with a company match, enroll as soon as you're eligible and contribute at least up to the maximum for the match. These accounts are a great benefit and the company match is free money. That's the best deal you'll get for a retirement plan--don't pass it up.