Planning for retirement: Early in your career

Quick answer: You need to start saving for retirement.

  • Check your budget to determine how much you can save.
  • Make savings a habit. The amount you’re able to save is less important than making the commitment and sticking with it.

Why start now

Let’s say you start investing at age 30 at a rate of $1,000 per year for 10 years. Your friend starts at age 45 and invests the same amount each year for 20 years. Even though your friend invested double the amount you did, because you started sooner, you could have over twice as much money when it comes time to retire thanks to the power of compounding interest.

retirement savings graph

The reason for all this is compound interest. When you put money into a retirement account, you don’t just earn interest on the money you contribute, but also on any interest earned over time. This way, your money grows faster than it would from your contributions alone. But this does take time.

How much to contribute

Try to save at least 10% of your income annually to your retirement plan in order to have enough income during retirement. Be sure to find out how much your employer will match. You should strive to save at least what the matching contribution would be, if less than 10% of your income. Matching contributions can provide a valuable boost to your retirement savings.

Use this calculator to see how some small steps can find you some retirement savings.

Retirement Saving Calculator
Ways to Save Monthly Savings Annual Savings Value at Retirement
$ $1,320 $99,530
$ $360 $27,144
$ $1,200 $90,482
$ $360 $27,144
$ $1,800 $135,722
$ $1,500 $113,102
Totals $6,540 $493,124

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Make it automatic

If you set up automatic savings, you’re less likely to forget to put retirement savings aside. There are a couple of ways to set up automatic retirement savings.

  • Transfer funds automatically from your paycheck to your retirement plan at work
  • Set up an automatic transfer from your checking account to your retirement plan

This way you’ll save regularly with little hassle.

Where to put your money

A common way to save for retirement is to take advantage of an employer-sponsored plan like a 401(k), 403(b), or 457, if one of these is available to you. The best reason to use an employer-sponsored plan is that many employers offer some kind of matching contributions to what you’re saving. This can provide a big boost to your savings.

These plans also allow you to pay less in taxes, because your contributions are not counted toward your taxable income. You won’t pay current taxes on any of this money until the funds are withdrawn.

If your employer doesn’t offer a tax-deferred plan, or you would like to contribute to an additional account, an Individual Retirement Account (IRA) is another option.

Don’t invest too conservatively

Early on, make sure your approach is not too conservative. Because you won’t be touching this money for 30 or more years, there is time to allow for a few market ups and downs. The biggest risk at this stage is not earning enough to outpace inflation.

Don’t touch your retirement savings

If you withdraw money from your qualified retirement plan before you are 59 1/2, you may have to pay a 10% Federal tax penalty. Also, if you borrow money against your 401(k), the loan will come due immediately if you lose your job subjecting you to potential taxes and penalties. While it can be tempting to use your retirement savings like you would emergency savings, it’s important to weigh the costs and potential penalties before acting.