The Importance of Saving Early for Retirement

Starting to save at your first job can greatly improve your retirement preparedness.

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It is essential to start saving and investing as early as possible for your retirement. The best opportunity for someone to do this is when they finish their education and start a full time job. The change in income is usually very large at this time and it is possible to save a good percentage of income while still upgrading their student lifestyle. Many new college graduates have loans, but they can pay these off slowly while saving and investing for retirement at the same time.

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Get the 401(k) match. Many employers have a 401(k) plan that a new employee can sign up for. The money is automatically deducted from their paycheck before tax and it often isn’t even missed. Most 401(k) programs also have some type of employer matching, typically 3 percent of salary, and the employee should take full advantage of this. At the very least, you should start saving for retirement by contributing up to the matching amount. A 401(k) match is an automatic and significant return. Don’t leave this money on the table.

Dollar-cost averaging and compounding. New college graduates have decades of work ahead of them and it's easy to put off saving for retirement until later. However, it is much better to start saving right away to take advantage of dollar-cost averaging and compounding right from the beginning of your career. The stock market historically performs very well over the long term and even the current volatility is great for dollar-cost averaging. When the market drops, your contribution buys more shares. If you have 30 years left in the workforce, you can ignore the day-to-day market fluctuation and keep buying. The earlier you start saving for retirement, the longer your retirement account will have a chance to compound and the more you will have for retirement.

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Start easy. Most young people do not know how to invest in the stock market when they receive their first paycheck. Don't let this stop you from investing in your employer’s 401(k). You can always start with the very basic and invest in a good total stock market index fund like VTSMX from Vanguard or a lifecycle fund. When you are starting out, it is more important to save as much as you can. It is much less crucial which fund you pick. Once you learn more about investing, you can adjust your portfolio and rebalance it as you see fit.

Increase contributions. Many new employees see very good raises over the first few years of employment. A portion of these raises can be redirected to your 401(k) with the goal of maxing out the yearly contribution limit. You can also start investing in a Roth IRA or open a taxable brokerage account for additional investing.

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Start investing early in your career and it will become a habit. By saving for retirement as soon as you start working, you will spend less money overall and learn how to invest. In 30 years, your retirement account will be in much better shape than most of your colleagues.

Joe Udo is planning an exit strategy from his corporate job by reducing expenses and increasing passive income. He blogs about his journey to early retirement at Retire by 40.