You may not have considered retirement savings as a top priority when you were younger, but starting to save early can make a big difference in your financial future.
If you’re fortunate enough to work for an employer that offers a 401k plan, contributing as much as possible is critical. Not only does it save you a ton of money in taxes, but it can also increase your chances of saving more than you initially thought.
Compound Interest
If you start saving early, your 401k savings could grow exponentially due to compound interest. Whether you invest in a mutual fund or a stock, compound interest works by earning interest on the original principal sum and any interest it has made.
While compound interest isn’t magic, it does have a powerful effect on the value of your money. Compounding can make you much wealthier over the long haul than simple interest.
This is why it’s so important to save as soon as you can. The earlier you begin saving, the more time your savings will have to grow through compounding, and the more likely it will be that they’ll end up in a significant investment by the time you retire.
In addition to growing your money, compound interest helps you avoid paying too much interest on your loans or credit cards. Bank loans and credit cards typically pay compound interest, so it’s best to shop around for the lowest possible interest rate and ensure you’re paying down your balance as quickly as possible.
If you’re starting and want to jump on your retirement savings, start by contributing as much as possible to your employer’s plan. This can be a great way to build up your 401k account and receive company-matching contributions simultaneously!
More Time to Work
The best way to get the most bang for your buck is to save early and often. One of the most significant benefits of saving early is tax-free compounding — the best way to grow your money. For example, if you put away $250 monthly for ten years, your investment will double. This will not only help you get your financial house in order, but it may also help you make a smoother transition into retirement.
To be sure, there’s no foolproof way to make sure your finances are in order when you retire. However, the following tips and tricks can give you the tools to achieve that goal without sacrificing your lifestyle or sanity. The key is to keep a close eye on your finances so you know when to hit the gym and when you can enjoy the finer things in life.
Tax-Free Growth
Starting early with your 401k retirement plans has the potential to help you amass more money in retirement. Your contributions can only pay taxes once they’re withdrawn at retirement. In addition, you can save on your taxes in the future because your earnings compound over time.
401(k) plans are popular with employees because they’re tax-advantaged and provide various investment options. Unlike bank savings accounts, which only pay interest, these plans offer stocks, bonds and mutual funds.
A traditional IRA is another excellent way to save for retirement. Anyone who earns income can contribute pre-tax dollars to this type of account, allowing contributions to grow tax-free until they’re withdrawn at retirement. Withdrawals earlier than this may incur additional taxes and penalties.
Employers often match employee contributions to their 401(k) plans, making it more affordable for workers to contribute. These matches can be a significant portion of your savings, up to 3 percent of your salary.
Matching Contributions
If you want to save for retirement, starting as early as possible is best. This is especially true if your employer offers matching contributions to 401k plans.
Taking full advantage of a 401k match will dramatically improve your retirement savings, even when you see little growth in the investments you are investing in. For example, if you start with $10,000 in your 401k account at age 25 and your employer contributes an additional 3 percent of your salary, your total 401k savings will be $42,000 by the time you retire–even though you haven’t seen any growth on those assets.
One of the most common types of 401k matching programs is to match an employee’s first 6% of their annual compensation up to a set maximum. But many other matching formulas vary from company to company, so be sure to talk with your 401k plan administrator about the specifics of your program.
Most 401k matching programs come with vesting provisions that allow you to receive ownership over the matched funds your employer makes on your behalf. This is a way for your employer to encourage you to contribute to the plan and reward you for your work. However, some companies require a waiting period before you entirely “own” the money your employer contributes on your behalf. Typically, this waiting period is anywhere from 3-5 years.
