So you have just finished college and are working in your first job; retirement feels like it is more than 40 years away — because it is. Why? you ask, should I be saving for retirement? I know it seems like contributing to retirement savings at your age is dumb when there are so many other pressing needs: student loans to be repaid, a decent car (finally!) and a home purchase all seem so much more important in your twenties than retirement.
Here’s why you should make some room for retirement savings
Never again in your life will your savings have the kind of future value that it have now. Even more important to your total retirement savings situation than your rate of return is the number of years you get that return. If you invest now, your savings will grow 15 to 20 times before you retire. In other words, $1,000 of savings in your twenties could become as much as $20,000 in retirement.
If your employer offers a 401k plan and is offering to match some of your contributions with additional money, you are literally walking away from free money if you don’t contribute to your 401k. Never walk away from free money!
I know it feels like after years of driving crappy little cars — or no car at all — as a college student, that you feel entitled to drive a decent car now. You deserve it. Really, you do. Don’t waste your money. Even though you deserve a decent car, your future self will thank you if you choose to contribute to retirement savings rather than investing in a car that immediately begins to depreciate, asks for gas money every week and needs maintenance and insurance on top of all that.
You can make penalty-free withdrawals from IRAs and borrow from some 401k plans to make home purchases. In other words, saving for retirement may serve your shorter-term goal of buying a home quite well. You’re best served by saving for both separately so you don’t take a step backward in your retirement savings when you buy a home, but if you can’t do both, save for retirement and watch for an opportunity to use the money to buy a home.
You have to pay off your student loans, no doubt about it. Don’t skip a payment now or ever so long as you are employed. That said, if you face a choice between paying extra to get out from under student loans faster or saving for retirement, save for retirement. (If you defer buying the car you deserve and drive your college clunker instead, you can probably afford to save for retirement and pay extra on your student loans while saving for a down payment on a home.)
By making even modest contributions to retirement each year in your twenties, you can have a big impact on your retirement. Imagine that you contribute 5 percent of your income for eight years to your retirement account and that your employer matches that 5 percent making it 10 percent of your income. With a typical college graduate salary of $40,000 for those eight years, you’d have socked away $32,000 that would become about $500,000 by the time you retire.
Devin Thorpe, husband, father, author of Your Mark On The World and a popular guest speaker, is a Forbes Contributor. Building on a twenty-five year career in finance and entrepreneurship that included $500 million in completed transactions, he now champions social good full time, seeking to help others succeed in their efforts to make the world a better place.