- Personal Finance
5 Reasons to Think About Retirement Before You're 25
Note: I am not a financial expert. Consult a financial planner before you decide to invest.
You're young. You've recently graduated college and have just entered the world of adulthood without being accountable to anyone. You've been told these are the most worry-free years of your life. Why think about retirement?
Financial experts agree: It's never too early to start planning.
1. Comparing Retirement Packages May Affect Your Job Choice.
We're not living in our grandparents' world, where you get one job and it's the job you keep until retirement. You may go back to school, or after working a few years, decide you want to pursue a different career path.
However, if you're in a demanding industry and are fortunate enough to have multiple job offers, taking a look at the retirement package may help in making your decision. Does the company offer a 401k plan? Will they match any contributions you'll put in?
2. Social Security Alone Won't Cut It.
Social Security was instituted by President Franklin D. Roosevelt to alleviate the widespread suffering of the Great Depression. It was never intended to substitute as a retirement fund. After plugging a few numbers into the Social Security Benefits Calculator, folks born in 1950 who averaged $30,000 in income a year can expect $809/month in Social Security benefits if they retire in 2013 at age 63. That equates to less than $10,000 a year!
There are some reports stating that Social Security payouts will soon exceed what is being paid in to the system, so there is a chance that Social Security might not exist by the time today's twenty-three year olds approach retirement age.
3. More Time to Accrue Interest.
It doesn't take a mathematician to figure out that money invested at 25 will earn more in interest annually than money invested at age 35, and this is thanks to our friend, compound interest.
Using the annual compound interest calculator at moneychimp.com, you play with some numbers just to watch the magic unfold. For example: Enter $3,000 as your principal with an additional $3,000 added annually, at an interest rate of 7.5% . Allot 25 years for growth. Hmm, right around $237,500. Not bad, but that breaks down to just under $12,000/year if you live 20 years past retirement.
Now, leave all the numbers the same, but change the years of growth to 35. Notice anything? How about an additional $300,000?!
4. More Time for Higher Risk Investments.
When you sign up for an investment account, you'll typically be asked what type of investing you're interested in: low risk, medium risk, or high risk. Low risk consists of safer investing methods, meaning your money will grow at a slower rate, but your money probably won't lose any value. Investing in higher risks (such as the stock market) could mean larger gains (but also larger losses). If you're 25 and entering the stock market, you have more time to absorb any losses and recover your money.
5. Invest Younger, Retire Younger.
With Social Security or IRAs, you need to wait until 62 (or later) to begin collecting. Depending on how much you want to invest per year, if you have success with stocks, mutual funds, real estate, or other investment tools -- you could set yourself up for retirement quite a bit sooner.
If you're over 25, you haven't missed the boat.
Maybe you went to school until you were 28, or maybe you've switched careers, and now you're making more annually than you did at age 24. That allows you to invest more per year, which could mean more money for retirement.
The point of this article is to encourage you to set a financial goal and go for it.