We’ve all thrown money away on outlandish purchases. As a freshman in college, I was a student worker earning minimum wage. Naturally, I thought spending a cool $500 on skateboarding sneakers was reasonable. I did not skate, mind you, but that’s beside the point. My supervisor at the time, perhaps sensing a perilous financial future, told me something I would soon not forget: “Wander, the day you are eligible for retirement benefits, you need to sign up – not a day later!”
Like many other Millennials, I moved back home after college, working full-time while going to graduate school part-time. After all was said and done, I had upwards of $50,000 in student loans. In 2013, I got my first “real job” and moved to Washington D.C. I had just proposed to my now wife, so life changes were rife! At the new employee orientation, the retirement presentation covered Social Security, Roth IRAs, 401Ks, and annuities. I was lost and knew I had homework to do. The results of my research were clear: the earlier you start saving, the better.
I share this personal anecdote because I had legitimate reasons to NOT save for retirement—student debt, an upcoming wedding, and new living quarters. The majority of Millennials are on the same boat. Not saving, however, hurts us more in the long run. There are many advantages to begin saving early; here are my top 3:
- Compound Interest
There are two types of interest—simple (nominal) and compound. Simple or nominal interest pays on the balance and not on the interest earned. Compounded interest, meanwhile, pays on the balance and interest earned. With compound interest, time is your friend. Here’s an example from Business Insider:
- Susan invests $5,000 per year from ages 25 to 35 only à $50,000 total savings
- Bill invests $5,000 per year, but from ages 35 to 65 à $150,000 total savings
Assuming a 7% annual return, guess who has more savings at age 65? Susan! She ends with up $602,070 while Bill has $540,741. Susan’s returns in only 10 years snowball exponentially. It’s to the point that Bill can’t catch up, even if he continues saving for an additional 20 years.
- Free Money
If your employer offers matching retirement contributions, take advantage of it! While this means having a smaller paycheck, not getting the match leaves free money on the table. If you automate the contributions, it won’t be long until you adapt.
- Tax Savings
Uncle Sam incentivizes retirement savings through tax breaks for specific investment vehicles. While far from comprehensive, below are two popular examples:
In 2015, you can defer up to $18,000 ($24,000 for those 50 and over). You pay income tax after withdrawals.
This credit is designed for lower income taxpayers. The amount of the credit is 50%, 20%, or 10% of your retirement plan or IRA contributions up to $2,000 ($4,000 if married filing jointly), depending on your adjusted gross income.
The IRS has all the retirement tax information you’ll need.
According to AARP, savers should aim for a 1 million dollar nest egg. For Millennials, retirement can seem like a long way off. It can be tempting to spend disposable income on bars, traveling, and partying. On the contrary, time is why we need to start saving! Make your money work for you. This will require sacrifice—learning to live below your means. You are in the driver’s seat to your retirement. Empower yourself by learning where to start.
Wander Cedeño is part of the GovLoop Featured Blogger program, where we feature blog posts by government voices from all across the country (and world!). To see more Featured Blogger posts, click here.
Thanks for sharing this Wander! As a mil and currently having a fellowship, 401k did not sound too appealing or worth it to me – but I got similar advice you did while in college. These advantages are great to know and reassures me that I made the right decision. Great post!
Excellent article, Wander! I completely agree. It is so worth it to take the smaller paycheck and contribute to retirement and savings! Great points.
Excellent article and I so agree. I had the same advice from my boss when I started in federal service, and it was so correct. Once you start saving, you don’t notice the difference, but you will be so grateful a few years down the road.