retired couple on beach who started saving early

When Should You Start Saving For Retirement

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Chances are you aren't saving enough for retirement.

It's nothing personal. In fact, I am not saving enough for retirement. I have over $200,000 in student loans and on my medical resident salary, every spare dollar goes to repay my loans.

If you want to see how much you should be saving, use this retirement calculator to check.

The Federal Reserve published a report highlighting that most people can't save for retirement:

  • Over 1 in 8 of Americans struggle to pay their bills each month
  • Half of Americans spent more money than they made
  • Nearly 1 in 4 Americans cannot pay their current monthly bills completely
  • Almost half  of Americans would not be able to cover an emergency costing $400
  • Most Americans with 401Ks, IRAs, or other retirement savings are not comfortable with how to make the right decision with their investments

The need to save is no secret, but as the statistics above show, saving is not easy. It’s actually really hard! How can one expect to save for retirement, if you need 25x annual retirement expenses to retire?

Saving Money Is Hard

One reason saving is hard is that it’s not prioritized or sometimes pushed into the future. Have you had these thoughts cross your mind: ‘I’ll start saving when I get that raise' or ‘it will be so easy to save when I get that promotion at work'?

It's easy to see how saving for retirement can become an after-thought. Especially when your friends and family may even try to dissuade you from saving by saying things like “you have to enjoy life” or “you can’t take all that money to heaven.”

Let’s be honest, there is some truth to that. Life should be enjoyed, but one thing we’ve learned is that while money can’t buy you sustained happiness, not having enough money and being broke will surely lead to misery.

Watch out for lifestyle creep!

The issue we have with the first few statements above is that when people begin to earn more money, they often allocate that money to new expenses before they save or invest in their own retirement. As soon as the raise or bonus comes, people start thinking about the new car or the kitchen remodeling they’ve been waiting for.

This is called ‘lifestyle creep’ because your expenses slowly creep up with your wages so that you barely realize it and you wonder where all your money is going.

Just like spending more than you earn is on one end of the spectrum, so is saving everything and not spending any money. We think you can achieve a balance where not only can you adequately save for retirement, but you will not feel like you are missing out on the fun things in life. In fact, we think living and spending purposefully can bring you more happiness!

Although it is true that you can’t take your money with you once you die, the point of saving for retirement is NOT to die surrounded by piles of cash. The purpose is to USE the money so you can sustain your quality of life once you stop working. Or so that you don’t have to work until you die.

It's so that you have freedom and peace knowing you have enough money to take care of yourself and your loved ones.

But if I am going to earn a much higher salary later in my career doesn’t it make sense to wait and save more money later?

Absolutely NOT. While this seems like a logical idea, this fails to take the power of compound interest into account.

The sooner you can start saving, the better off you will be. 

What is compound interest or compound growth?

Compounding just means earning money on money already earned.

If you save and invest for retirement, the money you save will not only grow as you save more, but will also grow as you earn profit on your investment. The longer you have your money invested, the faster it will grow. The profits will begin to earn profits.

For example, if you save $100 and earn a return of 10% annually, in year 1 you will earn $10. This is because $100 x 10% = $10. However, in year 2 you will earn a profit of $11. That extra $1 earned is due to compounding since you earned 10% on $110. In year 3 that profit jumps to $12. In this example, it is clear that without making any changes putting more money into the investment, you earn more every year just due to compounding.

This is what gave birth to the investment saying “Time in the market always beats market timing”.

Why should I care about compound interest?

  1. The sooner you start saving and investing, the more money you’ll have.
  2. To end up with the same amount saved at retirement, if you start earlier you can save less and still end up ahead

So, When Is The Best Time To Start Saving For Retirement?

Today!

By far, the best way to save for retirement is to start saving early and saving regularly!

Once you start saving, you'll want to focus on commonly used retirement accounts like 401(k)s and IRAs because of the tax advantages that they have. Once you're ready to start picking your investments, the best choice is to find the lowest fee index funds you can find. Some of the funds I invest in are listed here.

If you are ready to see the power of time and compounding in action here is an example for you. Take a look at the table below, which demonstrates how much identical twins, Jordan and Madison, saved for retirement. This example was done with a 8% annual rate of return.

when should i start saving for retirement

Breaking Down Their Retirement Savings

Jordan and Madison were born on the same day, have the same job, and plan to retire the day they turn 65. But clearly one of them found the best way to save for retirement! Jordan starts saving money right away in her retirement account for a total of 10 years, while Madison decides to start saving once she is a bit more established and can comfortably save without having to make any sacrifices.

While Jordan contributed $50,000 ($5,000 for 10 years), Madison put in  a whopping $150,000 ($5,000 for 30 years)! Despite saving only 1/3 of what Madison did, Jordan’s retirement savings are 50% more than Madison’s. If Jordan would have kept saving the same $5,000 for her entire working career, this single account would have ballooned to over 1.6 million dollars! That is the power of compound interest. As you can see, starting to save early is super important!

when should i start saving for retirementIf you want to be like Jordan, it’s time to get started. Whether you are early in your career or in your prime working years, the best time to start saving is now. Do not worry if you didn't start saving when you were 23, because there's nothing you can do to change the past. Just set your sights on the future and start your financial plan!

If you want to learn more about commonly used retirement accounts, read our posts on 401(k)s and IRAs.

If nothing else, just remember, the best day to start saving for retirement was yesterday. The next best day is today.

Francisco Maldonado

Francisco Maldonado, MD is a personal finance expert who was raised in poverty by a single mother and had to learn everything about personal finance on his own. In addition to running his personal finance site, The Finance Twins, with his twin brother, his site has been featured on ForbesBusiness InsiderCNBCUS NewsThe Simple Dollar and other top publications. Francisco is a physician who borrowed over $200,000 to pay for his medical training and understands debt payoff strategies and frugal living. He received his M.D. from the Mayo Clinic School of Medicine, the most selective medical school in the country, and a Bachelors degree in physiology from the University of Minnesota. He is currently a radiology resident at Northwestern University. You can contact Francisco here or via Instagram @thefinancetwins.

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