10/23/2020

6 Reasons to Start Retirement Planning Early

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early retirement planning

You may have heard this advice before: when it comes to retirement planning and saving, it’s never too early to start. But why exactly is this the case? The short answer is that waiting to start literally costs you money – and even if you start small, it’s better than not starting at all. Here are 6 reasons why you should plan for retirement as early as possible.

1. Make Money on Your Money

In case you didn’t already know, your retirement investment earns compound interest. Over time, that compounding effect can make a big difference in terms of how much you have to retire on.

Let’s explore an example using the Liberty Bay calculator to estimate how much your Traditional IRA might be worth at retirement. Say you want to retire when you’re 65, so you start putting $3,000 per year into your Traditional IRA. You’re making $50,000 a year right now, but expect to be in the 24% tax bracket at retirement. Assuming an 8% rate of return…

  • If you start at 25, your Traditional IRA will be worth $637,900.73
  • If you start at 30, your Traditional IRA will be worth $424,312.87
  • If you start at 35, your Traditional IRA will be worth $278,948.55

Of course, this is a simplified scenario that doesn’t take every single factor into account – but you can see that even a few years make a big difference to the final dollar value of your investment!

2. Take Advantage of Employer Contributions

How much you contribute to your retirement investments also makes a big difference in how much they’ll be worth when you retire. Many employers offer 401(k) matching, which means they will contribute to your retirement savings based on how much you contribute yourself.

The good news: this is basically free money for your future.

The bad news: your employer will only contribute if you also contribute. This results in many people leaving that free money on the table instead of taking advantage of this huge benefit!

Learn more about 401(k) plans and how you can use them to prepare better for retirement.

3. Start When You Have Fewer Responsibilities

Although everyone’s life plan is different, it’s likely that you have fewer financial responsibilities as a younger person. You may have plans to buy a house or a car, to have children and send them to college, or take care of your parents as they get older. Older adults also often experience higher costs of healthcare due to problems that arise with age.

Younger adults have their share of challenges, such as rent, student loans, or entry-level income. However, it’s most likely you won’t have as costly responsibilities to think about at 22 as you might at 44. While you have fewer responsibilities, work on creating a budget and building healthy financial habits that will allow you to contribute a good amount to your retirement nest egg.

4. More Investment Options and Risk Tolerance

Over the years, there may be times when your investments don’t grow. This can be due to a number of factors, such as fluctuating share prices and market volatility. The earlier you start, the better chance your money has to grow, including regaining any market losses.

This also gives you two other benefits: first, it’s far less stressful for you. When you feel like you’re on the clock, with retirement approaching around the corner, any market volatility can cause a lot of concern. Giving yourself time also means giving yourself some peace of mind.

Second, you can explore more investment options. People who start retirement investing later may have to “play it safe” and fill their portfolio with stocks that are less volatile, but usually have lower returns on investment as well. Investing earlier allows you to more safely diversify your portfolio and potentially increase your investment by a larger amount.

You may benefit from consulting with an investment advisor. Take a look at our FA$Ttrack course on Sustainable Investing as well to start from a strong foundation.

5. Retire Earlier

One big reason many people choose to start retirement planning early is so that they can also retire early. Whether you want to spend more time with your loved ones, explore the world, or enjoy passion projects, early retirement might suit your goals.

In fact, the FIRE movement (“Financial Independence, Retire Early”) has become an extremely popular lifestyle among young adults. While you don’t necessarily have to follow a FIRE lifestyle in order to spend more time in retirement, some of the habits encouraged in this movement could help if early retirement is one of your goals. Learn more about the FIRE lifestyle

6. Share the Wealth

Have you heard about legacy planning or building generational wealth? For many people, their financial goals may include growing their wealth enough so that they can share it with their families or with causes that are important to them.

If this is one of your goals, make sure to review our FA$Ttrack courses on Estate Planning and Wealth Transfer. Let Liberty Bay help you put a plan together to ensure your wealth goals can support your legacy goals.

 

There are many reasons to start retirement planning early. The most important thing is that you get started and keep your overall goals in mind as you budget and plan for your current needs and your future! At Liberty Bay, helping members of our community define and reach financial health and success comes first. Get in touch so we can discuss what we can do for you.

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