Let’s face it: Setting aside adequate funding for the future is a long, hard slog. Particularly for younger families who are early- to mid-career and have a lot of competing financial items to cover. Between raising young kids, paying mortgage or rent, and the countless other items that come with daily living, it can be stressful and difficult to see how everything is ever going to come together. Let alone saving for future goals – such as a home, kids’ education funds and the big one: retirement.
Truth is, we’re in an era where these pressures continue to increase. Education expenses seem to be heading to the moon. And the concept of an employer paying a retirement pension has been dwindling for decades. The burden has shifted to employees to fund their own retirements.
If you’re in this boat, consider these strategies that may help. I’ll start with saving for retirement.
The first decade of retirement savings builds your foundation
Let’s tackle the question of balancing saving for retirement and education with what we know today. Unlike your children’s education, your retirement can’t be financed with a loan. The thing you can control about saving for retirement is to start early in your life and remain disciplined in putting something away for the long term. I often advise people who are starting out in their careers, and it’s key for them to understand that the first 10 years of savings generally won’t feel like things are growing fast enough. What you’re essentially doing in that period is building a foundation: A meaningful amount of money that down the road should start to compound at a faster rate.
The more dollars you have in the foundation, the more they can generate with even slight increases in investment returns. Think of it this way – making 10% on $1,000 produces $100 of investment returns. At the end of the day, $100 may not last too long in retirement. However, if you can build a savings balance to $100,000 and get 10% returns, that amounts to $10,000. Now start to replicate that over time, and eventually those return dollars start to compound at a higher rate than your annual contributions.
The graphic below provides a good example of how compounding works. Compare the “Consistent” example with the “Late” results. Those 10 years of starting early are highly advantageous in terms of compounding.
The gap between Consistent and Late carries a powerful message: Use those early career years to start putting money away to build up your foundation. Decide on an amount you can afford – and just start and stick to the plan. As your pay increases, you should reassess to …….