You are twenty-one years old. You are young, and you have never thought about the word retirement in your whole life. Your employer offers a 401k that you don’t use, and you have some friends who mention their 401(k), but you’re pretty sure they don’t even know what it is or what it’s for. A few web searches might hold the answer to all the questions you have, but who cares? You’re twenty-one. It’s Friday night, and you have a party to go to. Retirement is the last thing you should be thinking about at a time like this—or is it?
Many people spend their lives believing that retirement is the last thing they need to consider, and before they know it, they are in their fifties and really wishing it would have been the first thing they had thought about. They didn’t believe that the day would come; yet there they are staring wide-eyed at their online banking app, doing Einstein-level quantum equations, trying to figure out how the $30,000 that they saved over their lifetime is going to feed them for three decades in retirement. They’ve realized too late that living on social security alone is living in poverty and that being old is much more expensive than being young.
Thank goodness, though, because you are still twenty-one. Let’s examine some of the facts and numbers behind saving for retirement. Arguably, the biggest benefit of putting money into your individual retirement account (IRA) or 401(k) retirement plan is that you can’t be taxed on a single dime until withdrawal. We all hate seeing that section on our paycheck stubs where hundreds of dollars are taken from us and used to fund wasteful spending by the federal government. Why not just save some of that frivolously spent money by contributing to tax deferred accounts like your IRA or 401k?
The most integral thing a young person should realize about retirement planning is the importance of compounding interest. Compounding interest is the method by which you can save thousands and potentially end up with millions. To illustrate this concept, let’s use an example: You contribute to an IRA the maximum amount allowed by the IRS, which is $5,500. Let’s take a modest estimate, and say that your $5,500 grows at 10 percent each year; by 2060, you will end up with $331,320.38. Think about that. You spend $5,500 on the future, just this once, and end up with around $330,000 by retirement. Pretty exciting, huh? But that’s not it. Let’s say you maxed out the allowed contributions of $5,500 per year for five consecutive years so that you end up with $27,500 in your IRA by 2021. Congratulations. By 2060 you will be a millionaire with over $1.1 million for retirement. Now, I know this is asking a lot, but let’s imagine you maxed out your IRA account every year until 2060. Well, if you were crazy enough to do that, you’d end up with $3,915,344.56. Yes, even you could be a multi-millionaire.
OK, you twenty-one-year-old, forever-living, never-growing-older person, living only for the present moment—are you still with me? Good. Put aside this article, and go put $100 into your IRA account. Then do it again for every paycheck you get. If you don’t start now, the years will fly by, and you will be old and retired, thumbing the last few dollars from your social security check, deciding whether to buy the discount ramen noodles or a back brace so you can go back to work—all the while wondering what you could be doing if you had a few million extra dollars lying around.
I know it can seem impossible to manage stashing away thousands of dollars each year, especially when you are spending every dime you get on bills and food. Regardless, you shouldn’t get discouraged from saving and investing just because you can’t make the maximum contributions. As the adage goes, something is better than nothing. If you can’t save thousands, save hundreds. If you can’t save hundreds, save ten. All that matters is that you save while you are young. A dollar saved today is, quite literally, worth more than a dollar saved tomorrow.