If you’re anything like the average millennial, you’re probably more worried about immediate concerns like paying off student loans and building a career than planning for retirement. For one thing, it’s so far away. If you’re 28 years old and plan to retire at 65, the year 2055 can seem as foreign a concept as flying cars and teleportation.
But whether or not we’re all traveling via pneumatic tubes by the middle of the 21st century, needing money for retirement is a given. Here are five ways that everyone should start preparing for retirement before turning 30:
- Harness Compound Interest
First, to understand how important it is to start saving for retirement now, let’s look at the term “compound interest.” It is one of the most powerful forces you can harness to build your retirement savings. Meaning, essentially, “interest on the interest,” it’s the idea that any interest you earn on an amount is then added to that amount and earns more interest.
Confused? Here’s an example: Let’s say you save $100 in an account, and the rate of return is 5%. At the end of the year, you have $105 instead of your original $100. For the next year, even if you don’t put another penny into that account, you earn interest on $105 throughout the year instead of on the $100 you initially put in. At the end of the year, you will have a total of $110.25, even though you only put $100 in the account initially. I.e. your money is making its own money through the magic of compound interest.
Now, $110.25 isn’t enough money to retire on, but when you start talking about bigger numbers, compound interest really adds up. The trick, though, is that it takes time to build up. Lucky for millennials, we have about 30-40 years to let that money work for us, which is why it’s important to start saving for retirement as early as possible. Even if you can’t contribute a ton of money right now, start early to take full advantage of compound interest.
- Balance Paying off Debt with Saving for Retirement
At this point, you may be thinking that saving for retirement is much lower on your priority list than paying off student loans or other debt. Believe me, I understand. I first started saving for retirement while I was also aggressively paying off $30,000 of student loan debt, and it was hard to balance the feeling of wanting to do everything possible to make that debt disappear with saving for some far-off, grey-haired version of myself.
If other priorities are keeping you from contributing the limit to your retirement account or maxing out an IRA, that’s okay. Just save something. Start with $25 or $50 a month, and keep increasing that number every time you get a raise. If you get a tax refund or a nice birthday check, try splitting the amount — maybe 40% toward retirement, 40% toward a loan payment, 20% for something fun.
- Find the Right Investment Plan for You
Finding the right investment plan for your current situation can seem daunting, and it’s helpful to remember that what works for you right now can (and probably will) change. One thing to keep in mind is that a millennial who still has decades of earning can afford to be riskier with investments than people who are nearing retirement age and don’t have the luxury of time to recover from big ups and downs in the market.
Also, there are a ton of services and brokerage account options out there. A brokerage account is an investment account with which you can buy and sell stocks, bonds, and mutual funds. If you want to be hands-on in picking your stocks and placing trade orders, there are definitely accounts out there that let you do the driving. Alternately, there are a number of good options if you’re looking for a company that will offer more guidance and do the behind-the-scenes work. It all depends on your personal preference.
- Take Advantage of An Employer Retirement Account
If you’re fortunate enough to have an employer that matches your retirement contributions, the most important thing you can do is to take advantage of the full match, or as close to it as you can manage. If you’re not sure what this means, here’s a quick crash course: the employer will match any money the employee puts into the retirement account up to a certain amount, usually between 3-8% of their salary. If you put in 8% of a $50,000 salary, which amounts to $4,000 a year, and your company matches up to 8%, your company will also put $4,000 into that account. It’s literally free money, on top of your salary.
The caveat is that it’s for retirement, so you can’t use it right away, and some employers have a vesting period that you have to fulfill before you get to keep the money. The way vesting works is that if you stay with the company for a required period of time, usually between 1-4 years, you get to keep the match amount. If you quit or are terminated before that vesting period is over, you only get to keep the money you put in, not the employer match. The good news is that vesting periods are often negotiable. When I accepted my last job offer, I asked for them to waive the vesting period. They agreed to it, so I got to keep the employer contribution to my retirement account from day one.
- Open An Individual Retirement Account (IRA)
If you’re a non-traditional employee or can’t take advantage of an employer account for whatever reason, the good news is that you can open an individual retirement account that’s not tied to any employer. You won’t get an employer match with this kind of account, but you can still take advantage of compound interest.
There are essentially two different kinds of individual retirement accounts: a traditional IRA and a Roth IRA. With a traditional IRA, the taxes you pay are deferred until you withdraw money — usually once you’re retired. People are often in a higher tax bracket when they hit retirement age, which means that with a traditional IRA, you risk having to pay more taxes. With a Roth IRA, the contributions you make to the account are post-tax, so when you withdraw this money during retirement, you won’t pay taxes on it. It often makes sense to have a Roth IRA when you’re younger and thus probably making less money and paying less in taxes. Whichever one you choose, if you don’t have an employer-sponsored retirement account, consider opening up an IRA so you can start saving for retirement on your own.
Regardless of whether you have been maxing out a Roth IRA since you were 20 or if you’re still figuring out which retirement account is best for you, it’s important to save for retirement. Your future self will thank you.