Almost everyone makes foolish financial decisions when they're young. There's the pricey fashion-of-the-moment that you can't live without ... until you realize just how hideous you look. There are the expensive drinks (and too many of them) that you want to be seen sipping at the hippest bar in town.
I've destroyed most of my bad fashion pictures. But I'm still kicking myself for spending my 20s hopping from apartment to apartment when I could have bought a condo and cashed in on the red-hot Washington, D.C. real estate market.
Failing to save for retirement can be another costly decision. Take it from us old folks, you're going to want to stop working someday. If you start saving for that golden era of retirement at a younger age, you have time on your side. This is one of the perks of youth (in addition to the ability to get over a hangover pretty quickly).
When you start saving at a younger age, you have many more years for your savings and their earnings to grow, even if you don't save a ton of money. It's the magic of compounding interest. Because there are lots of things competing for your scarce dollars when you've just started working and your salary is low, let's examine this magical force of finances.
Let's say you're fresh out of college, 22 years old, and expecting to retire at that hazy future moment when you turn 65 years old. (I know you don't believe it will happen, but time marches on.)
If you put away $1,000 at age 22 and left it alone for 43 years until retirement, you would end up with $27,367. If you put off saving that $1,000 until the ripe old age of 30, you'll have only $14,785 when it's time to retire. Both of these scenarios assume your money earns 8% each year. You're not misreading this. In this example, you can almost double your money just by starting sooner.
So how do you get started? One place to look is your employee benefits. If your company offers a 401(k) plan, that account will let you put away money for retirement. This is a particularly excellent idea if your company offers to match a certain amount of your savings. Commonly, an employer will offer to match $0.50 for every $1 an employee saves, up to 5% or 6% of the worker's salary.
Fools like to call this free money. Even if you have to cut out a happy hour or two, it's worth trying to contribute enough to maximize your employer's match. Otherwise, you're leaving free money on the table.
If your company doesn't offer a 401(k) plan, or if the company doesn't offer any matching contributions, take a look at the Roth IRA. This retirement account is different than the 401(k), which lets you save money before paying taxes. With the Roth IRA, you deposit money into the account after paying taxes. The benefit is that if you follow the rules, you'll never pay tax on that money or its earnings again. This can be particularly advantageous for young workers who may not be paying much in taxes now.
Another difference between these two accounts: A 401(k) plan will come with a limited number of investment options for you to choose from. If you open an IRA at a brokerage, you'll have a full range of stocks and funds to select. That means you can invest in the hippest high-tech gizmos you can find, like Apple's
Young and not-so-well-paid workers may also be able to cash in on a little tax perk called the "saver's credit." Single people making up to $25,000 can get a federal tax credit refunding a portion of their savings. It can be worth up to $1,000 for contributions made to a 401(k), an IRA, or another retirement plan.
A credit reduces your taxes dollar-for-dollar, and, as we saw before, $1,000 saved early can go a long way. (The maximum benefit goes up to $2,000 for married couples. It's available to families earning up to $50,000.)
The Internal Revenue Service is also making it a little bit easier to save for retirement. Starting next year, you'll be able to split your tax refund and have it directly deposited to more than one account. That means you can earmark part of your tax refund for retirement savings, send it directly to your 401(k) or IRA account, and never be tempted to spend it on energy drink cocktails or skinny jeans.