NEW YORK (MainStreet) — When it comes to saving for retirement, sooner is better than later. The longer you wait to save for your retirement, the higher percentage of your income you're going to have to put toward retirement when you're older. On the other hand, if you start saving from a young age, you can put aside comparatively less money out of your weekly paycheck and let interest and yield do all the work for you. Saving money for retirement straight out of college -- or even before -- might not be the sexiest topic for a young person. But there are strong and compelling reasons to get started early.
This is the big one and it's probably why half of all Americans wish they had started saving for retirement earlier. Ellie Kay, a family financial expert based in Southern California, notes that "you could just invest in a fund for five years, never touch it again and have a couple hundred thousand dollars in 20 years." That's because of the way that compound interest works. It's the main reason why you should invest for you retirement as young as is possible.
Kevin Gallegos, vice president of Phoenix operations with the Freedom Financial Network, agrees. "Every time your institutions calculate how much they're going to pay you in interest, they include the interest earned from the last compounding period." This works against you when it comes to consumer debt. However, when you're saving for retirement, compound interest is a powerful and unstoppable force rolling a snowball in your direction.
Flexibility and Freedom
"There's a level of freedom that occurs when you start saving at a young age," says Gallegos. "How would it feel to be 55 and have $2 million in the bank?" He notes that, not only will you have more freedom when you're older, but that you'll also have more options when it comes to how you spend your retirement. "It's about being set up for the lifestyle that you want," he says. So if you want to take a cruise around the world in retirement, start saving for it now. You might be able to say "bon voyage" to your working life sooner than you think.
Your Expenses Are Lower
Let's face it, when you first get out of college or you're still in high school, you don't have a lot of cash. But the other side of the coin is the fact that you also probably don't have a lot in the way of expenses. Kay points out that most of what young people spend their money on is entertainment and clothing. "You live at home and you might drive your parents car or use public transportation," she said. So while it might mean one less trip to the movies that month, or a couple fewer rounds at the bar, coming up with $50 or $100 a month is a lot easier than when you have kids and a mortgage.
How to Save for Retirement at a Young Age
So how do you even save for retirement when you're young? Gallegos and Kay both agree that it's simplest if you just auto debit any money that you can specifically into an account for retirement savings. And don't forget to take advantage of any matching programs that might exist. Some companies, such as Starbucks, REI, Trader Joe's and UPS offer retirement benefits to part-time employees, so you might even be able to begin saving for retirement while you're still in high school.
Gallegos advises people to look at putting something modest into their retirement savings account -- 10 to 15%. "It's not a ton of money in the grand scheme of things," he says. He thinks of it as "paying yourself first." "When you look at your bills, pay yourself first. Put that 10% into your savings right away."
Finally, Kay says that there's one creative way that young people can start saving for their retirement. "Grandparents love spending money on their grandkids," she says. She says that you might want to try going to your grandparents and telling them that you want to take advantage of compound interest. So instead of birthday and Christmas gifts, you ask for them to put $50 a month into a retirement fund for you. "If you approach your grandparents when you're young like this, they might be so impressed that they're even more generous than you expect." She also notes that some kids even have four grandparents, so that's $200 a month if they all sign on.
Anyway you look at it, the earlier you start saving for your retirement the better. Once you get into the habit of letting money hit your savings directly from your paycheck, you're not even going to notice that the money is gone.