Savvy suggestions for the latest generation entering the workforce.
When you’re starting your career and daily expenses stretch every paycheck to the hilt, it’s easy to put off saving for a retirement that feels far away. But keep in mind that saving may be the single most important financial step you can take, and right now is the crucial time to start.
Why should I start saving now?
- Time is money. Starting early makes a huge difference, thanks to the way savings compound over time. Save $5,000 each year for 35 years and your nest egg could be $691,000 (assuming 7 percent annual return). Start 10 years later and you’d have less than half, or $316,000.¹ Please note that the savings value can also be affected further by inflation.
- It’s easier to develop a savings habit. Get used to putting money aside regularly, before you face the expenses of a house and family. When saving is part of your routine, you’ll be less likely to notice, or miss, the money going into your savings.
- Your sacrifices will absolutely pay off. While money you spend on trips or daily $3 lattes is gone forever, your savings isn’t gone; it can just keep growing for your own benefit later on.
How should I save?
- Your 401(k). Your company’s 401(k) retirement plan is an easy, straightforward way to put money aside for retirement. At the very least, be certain to contribute enough to gain any matching contributions from your company; otherwise, you’re leaving free money on the table.
- Start an IRA. If you’re able to save a little more, consider starting your own IRA account, which can help you diversify your savings. In particular, you may want to consider a Roth IRA.
- Traditional 401(k)s and IRAs offer immediate tax benefits, since you are able to contribute pre-tax money, which can then grow on a tax-deferred basis until you retire. The downside is that the money you remove later on (withdrawals are required after age 70) will be taxed as regular income.
- With a Roth IRA, by contrast, you contribute income that’s already been taxed. The advantage is that when you begin to take withdrawals in retirement, you pay no income tax on the money. Also, there’s no requirement to begin taking withdrawals at 70 if you choose not to. Supplementing your savings with a Roth IRA can allow you to lessen the impact of taxes when you’re no longer receiving a salary. Keep in mind that IRAs require a little extra commitment. Unlike a 401(k) where you simply sign through your company and deductions happen automatically, you must actively set up an IRA and make periodic contributions. But that small commitment may yield big results, leaving you well-positioned for retirement.
¹ Source: United States Department of Labor.
Neither Nationwide nor its representatives give legal or tax advice. Please consult with your attorney or tax advisor for answers to your specific tax questions.