We’ve all been there, or maybe not. Thinking about retirement seems like a long stretch for some. If you’re young, thinking about the morbid reality of your final 10-20 years is the last thing you want to think of. The most common thought for retirement is the end of a career, at age 59½. Although this is the legal age at where you can start withdrawing funds without a penalty, there are other ways to support yourself if you retire earlier. This was the reason holding me back from starting my retirement fund. Nobody told me that it’s easier to save when you’re younger because of compound interest. Money in the stock market grows at an average* 7% a year. Now do that 30 times, maybe 35 times if you’re younger. “I’m still young, when I start my REAL career. That’s when I’ll put money into a 401(k)”. “I just had a kid, so I’ll save for retirement after I buy my house.”. There will always be reasons to avoid saving, so it’s better to start now than never.

Starting off Small

The easiest way to start saving for retirement is through your employer 401(k) or 403(b). Many employers offer a dollar for dollar match or a match of some sort. I always plead people to start taking at least the minimum for the match. “What happens to the money if I quit this job?”. This is a good question because it really depends. Some companies have vesting requirements that require you to work a certain amount of hours, or days in order for you to keep their match. Don’t worry about your contributions though, those are yours regardless. You can always roll them over to an IRA (Individual Retirement Account). A good term to keep in mind is vested balance. This is money that is 100% yours and will guarantee to roll over if you quit or change jobs. So don’t worry about changing jobs you can always roll over your 401k’s to your own IRA or even roll over your IRA to your new job’s 401k. So don’t make excuses about waiting for the “career”.

Compound Interest

Compound Interest will be your best friend for this retirement journey. Starting earlier only makes it easier since money can multiply quicker with time. Even doing something small like $100 a month can make a HUGE difference.

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Let’s say you start saving $100 a month at age 20. You earn an average of 4% annually, compounded monthly across 40 years. You earn $151,550 by age 65. Your principal investment was just $54,100.

Your twin doesn’t begin investing until age 50. They invest $5,000 initially, then $500 monthly for 15 years, also averaging a monthly compounded 4% return. By age 65, your twin has only earned $132,147, with a principal investment of $95,000.

When you hit your 45-year savings mark—and your twin would have saved for 15 years—your twin will have less, although they would have invested roughly twice your principal investment.

“ – Investopedia ‘The Power of Compound Interest’

Next Steps

I’m going to be honest, a 401(k) alone will not be enough for you to retire. That’s why you must also explore other options. Especially if you think about retiring earlier. You must explore other options like a ROTH IRA which allows you to withdraw all profits tax free at age 59½. Maybe even starting your own individual taxable brokerage account. You have to get creative. Maybe you can rent out an old property, or sell an old business. You are looking for ways to supplement your income when it becomes difficult for you to work. The more streams of income you have, the more chance of success you will have during retirement.

Bottom Line

It’s scary to think about the future, but it feels so good to have control on it. Knowing that you can make huge impact now while taking small steps. The best time to take risks is when you’re younger, because you will always have time by your side to help you correct them if anything goes wrong. Also always have a balance, don’t get too obsessed saving for retirement because remember you have to live your life now!

Thanks for reading and see you next Sunday. – Pablo