Plan your retirement early: Why starting now matters
Why you should start retirement planning early:
In the early years of your career, the need to build a financial plan for retirement can feel far away. However, this is a time filled with opportunities to establish yourself, build the life you envision, and make progress on paying down student loans. Embracing these challenges now can set a strong foundation for a secure and fulfilling future.
With professional guidance and practical strategies for saving and investing, you can start taking the steps towards securing your future. In fact, you’ll find that prioritizing financial planning now can help you build a foundation that will carry you through each stage of your career and future plans. Read on to see how you benefit from early retirement planning, then learn actionable steps to get started.
Start retirement planning early: Understanding the landscape of retirement saving
First, you should understand the various retirement savings vehicles available. There are 3 major categories of plans:
- Defined-benefit plans: Often called pensions, with these plans your employer puts aside and invests money for employees and guarantees a set monthly payout upon retirement. These are more common in the public sector and typically require long-term service in the same organization.
- Defined-contribution plans: These include 401(k), 403(b), and other employer-offered savings plans. With defined-contribution plans, employees set the amount contributed. Often, employers will match those contribution, or a percentage of them. These plans have set maximum contributions and many allow you to contribute pre-tax income, reducing your taxable income for the year and allowing your investments to grow tax-deferred until withdrawal.
- Individual Retirement Accounts (IRAs): IRAs are an option for those who do not have access to or do not prefer employer-offered plans. These come in two primary forms—Traditional and Roth. Traditional IRAs offer tax-deferred growth, which means you invest pre-tax income, reducing your tax liability now, then pay taxes on withdrawals once you retire. Roth IRAs, on the other hand, allow for tax-free withdrawals in retirement since your contributions are made with after-tax dollars.
If your workplace offers a defined-contribution option, it’s a no-brainer to take advantage of it with automated contributions— especially if there’s an employer matching option. According to the Bureau of Labor Statistics of workers with access to an employer-sponsored plan, 60% contributed in their 20s with that number increasing to 84% for those in their 50s.
One benefit to starting retirement planning early: The power of compound interest when investing
When you contribute early, whether to an employer-sponsored plan or an IRA, you benefit from compounding interest. Compounding occurs when the returns on your investments generate their own earnings. Over long periods, compounding can significantly increase the value of your savings. The earlier you start, the more time your money has to grow.
Strategies to help you start retirement planning early: Balancing financial obligations & financial goals
These key strategies can help you balance current obligation with future financial planning so you can work towards achieving your financial goals:
- Prioritize high-interest debt: Focus on paying off high-interest debt, such as credit card balances, to free up more funds for retirement savings.
- Refinance loans: Look into refinancing options for student loans and mortgages to reduce monthly payments and free up cash flow.
- Create a budget: A detailed budget helps identify areas where you can cut back and allocate more towards savings.
- Automate savings: Set up automatic transfers to your retirement accounts to ensure consistent contributions.
- Take advantage of employer benefits: If your employer offers a 401(k) match, automate your contributions to get the full match—essentially free money for your retirement.
Working with a financial professional to start retirement planning early in your career
Consider working with an experienced financial professional to create an individualized financial plan for retirement. They’ll guide you through important decision-making and strategies for your financial goals at every stage of your career, and can help you with the following important steps:
- Assessment: They’ll start by helping you evaluate your financial situation, including income, expenses, debts, and savings.
- Goal setting: Next, you’ll define clear, achievable saving targets— for retirement and other longer-term financial goals.
- Strategy development: Your financial professional will then recommend investment strategies and savings plans that align with your risk tolerance, goals, and timelines.
- Ongoing support: Over time you’ll want regular reviews and possible adjustments to your plan as your circumstances and needs may change.
To find a trustworthy financial professional, consider:
- Credentials: Look for certifications such as CFP® (Certified Financial Plannertm) or CFA (Chartered Financial Analyst).
- Reputation: Check reviews, ask trusted friends or family members, and ask for references.
- Fee structure: Understand how they charge—whether it’s a flat fee, hourly rate, or percentage of assets managed.
Early retirement planning: Saving strategies-tax-advantaged accounts, risk tolerance, and diversification
- For a simple and strategic start, automate contributions to your IRA or employer-sponsored plan. Even small amounts will add up over time.
- Understand your risk tolerance—how much loss you can handle during market fluctuations. This will guide your investment choices. Younger investors can typically take more risks with stocks, while older individuals might prefer safer assets like bonds.
- Diversification, spreading investments across different asset classes (stocks, bonds, real estate), reduces risk and can increase returns. A diversified portfolio is less likely to be heavily affected by the poor performance of a single investment.
Your risk tolerance and diversification strategy will change over time. A financial professional can help you adjust your plan as your circumstances evolve.
Taking action now for early retirement planning
To recap and start your path to a secure future:
- Set up your retirement accounts: Open a 401(k) through your employer or an IRA through a financial institution.
- Automate contributions: Set up automatic transfers to your retirement accounts to ensure consistent saving.
- Increase contributions gradually: As your income grows, aim to increase your retirement contributions.
- Review and adjust: Regularly review your retirement plan with a financial professional and make adjustments as needed, especially after significant life changes that can impact your overall financial plan.
- Stay motivated: Track progress, set milestones, and stay informed about retirement planning and investment strategies.
By taking control of your retirement planning today, you’ll gain peace of mind while securing the foundation of your future financial goals. Remember, the earlier you start, the more time your money has to grow, and the better prepared you’ll be for a comfortable retirement. Start today by reaching out to an experienced financial professional— your future self will thank you.
Please be advised that this document is not intended as investment, legal or tax advice. Accordingly, any tax information provided in this document is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer. The tax information was written to support the promotion or marketing of the transaction(s) or matter(s) addressed and you should seek advice based on your particular circumstance from an independent tax advisor.
CFP® and CERTIFIED FINANCIAL PLANNERtm are certification marks owned by the Certified Financial Planner Board of Standards, Inc. These marks are awarded to individuals who successfully complete the CFP Board’s initial and ongoing certification requirements.
