By Erienne Andvik
MoneyMix Contributor
You've heard it hundreds of times--start saving for retirement now. Ok, ok, we get it. But what exactly does it mean? Where do you start? How much money is enough to be saving?
You can start saving for your retirement in your early twenties and still have fun- you just have to be smart.
It's a lot easier to do something if you know why you're doing it. There are tons of good reasons to start saving for retirement, but here are a few to get your wheels turning:
- Social Security is not a sure thing. Unfortunately, many experts believe the generation entering the workforce will not be able to rely on Social Security as a viable source of income in our golden years, so we're going to have to fend for ourselves.
- The value of compounding interest is huge. When you start saving for retirement, you'll earn interest on the money you save--and eventually you'll earn interest on the interest from the money you save. See the value here? You're earning free money on free money, and the earlier you start, the longer your "interest on the interest" phrase will be (read: a much bigger account balance when it's all said and done.)
- Once you get used to a higher income, it's hard to readjust your budget to start saving. You're already used to living like a college kid, so if you save the extra money you make from your first real-world job before you ever see it, you won't know what you're missing.
How does it actually work?
Alright, so we agree it looks good on paper to start saving for retirement, but how does it actually work? To get real-world answers, we went directly to the source--three individuals who are not certified financial planners, but who are in various stages of saving for retirement and have some "been there, done that" advice for your benefit.
When you're first starting out on your own, there are a lot of expenses, and chances are your pay check isn't huge. You'll incur expenses getting yourself set up in an apartment, perhaps buying a car, and replacing your sweats with a wardrobe suitable for the working world. Besides the necessities, there are other fun things-like traveling-you'll want to do while you still have a lot of freedom. So how can you eat your cake and have it too? To find an answer, we turned to someone who has been successfully saving for retirement for 28 years-since his first job out of college. Tom Ryan, 50, of North Mankato, Minn., says the key to saving enough and having fun is paying cash for your expenses and not using credit cards and going into debt. If you don't pay off the credit cards each month, you'll be stuck paying interest and end up paying more than you bargained for. That extra money could be used for your retirement instead of credit card payments."Try to make your money work for you instead of you working for your money," says Ryan. That means paying off debt, finding ways to pay for the things you need with cash (not paying interest on them), and saving leftover money where you're earning interest (your money is working for you.) You can start saving for your retirement in your early twenties and still have fun--you just have to be smart.
Amy McCallister, 32, of Lakeville, Minn., graduated from college 10 years ago and now works in sales, but she recalls the challenges of saving for retirement in her early twenties. "I have never felt so broke as I did right after college," says McCallister. "I hate paying interest, so my goal was to get my debt paid off. After that was done, I started putting whatever I could into a retirement account, which was only about $600 a year, but it was something." If you take a hard look at your expenses, you can find room to put some money away, even if it's just a little to start. With each raise she got, McCallister increased her retirement contributions. Now in her thirties, she and her husband have made saving for retirement a fixed expense in their budget and each contribute $500 a month to their retirement savings.
Greta - age 23 | Amy - age 32 | Tom - age 50 | |
When did you start saving for retirement? | Age 23 | Age 23 | Age 22 |
How are you saving for retirement? | Maximizing yearly contributions to a Roth IRA account | Maximizing yearly contributions to a Roth IRA account and saving with other personal accounts | Maximizing yearly contributions to a traditional IRA. |
How are you investing for retirement? | No investments yet | Maximizing employee-sponsored 401(k) plans | Balanced portfolio of 60% stocks & mutual funds and 40% bonds & bond funds |
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