A:

The best answer to the question "How soon should I start saving for retirement?" is probably "yesterday" – and the second best answer is "right now." The simple fact is no matter what a person's specific retirement goals, it is easier to achieve those goals the sooner the person begins saving for retirement.

The Huge Difference by Starting Early

The difference between starting earlier versus starting later is so huge it is almost unimaginable. For example, imagine an individual begins saving $6,000 a year at age 25, putting the money into a tax-deferred retirement account such as a traditional IRA or Roth IRA. The individual follows this savings plan for only 10 years, and then completely stops saving at 35. Assuming the money earns a roughly 8% annual return for the next 30 years, by the time he turns 65, his total investment of $60,000 would be worth $950,000 or just short of $1 million. Now imagine a second person waited until 35 to start saving, and then began saving the same $6,000 a year for the next 30 years, until turning 65. Despite the fact that he saved for 20 more years than the first person and still earned the same 8% annual return on the money, starting 10 years later would cost him nearly a quarter of a million dollars, or almost $250,000. Despite saving diligently for 30 years, by starting later, his savings would only be worth $750,000 rather than a million.

Many people have difficulty understanding how it works this way, but the key is, the individual who only saved from 25 to 35 had already, at age 35, piled up over $100,000 that then continued to earn annual returns at the same time the individual who began saving at 35 made his first $6,000 contribution.

Factors to Consider

Some of the important factors to consider in beginning retirement planning and setting up a savings program include such things as the age at which an individual wishes to retire and how much retirement income he wishes to have. Also important to remember are the effects of inflation and taxes. Inflation continually erodes an individual's purchasing power and what might look like a fine retirement income when a person is 35 may in fact turn out to be woefully inadequate at 65. Baby boomers who grew up and began working during the 1940s likely could never have imagined $300 a month electric bills or $3 a gallon gasoline prices. In regard to taxes, the historical trend has been for tax rates, both state and federal, to increase over time. Therefore, the bite taxes take when an individual begins to draw his retirement funds is likely substantially higher than current tax rates for the same amount of income.

How to Begin Saving for Retirement

Beyond starting as early as possible, the next important step is developing a savings plan designed to attain one's retirement goals and then sticking to the plan. This is actually another good reason to begin saving for retirement as soon as possible, since the habit of saving money regularly, like any other habit, is easier to develop the sooner in life a person begins practicing it.

The rise of individual retirement savings accounts, such as 401(k) plans or IRAs, along with the gradual disappearance of many company pension plans, has placed more personal responsibility on people to provide for their own retirement. The security of Social Security is increasingly threatened, and most people realize Social Security does not adequately provide for a comfortable retirement in any event.

Professional investment advisers generally advise dedicating at least 10% of net income to a retirement savings plan. Many also advise setting up a traditional or Roth IRA in addition to taking advantage of 401(k) plans that offer matching funds from an employer. The reason for this is twofold. First, a 401(k) plan by itself may not provide adequate retirement funds. Second, an individual has much more flexibility in available investments in an IRA account.

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