We don't all achieve financial milestones on the same schedule. Some of us manage to become debt-free in our 20s, while others struggle to shake that burden for most of our adult lives. Some folks buy homes in their 20s and enjoy the associated benefits earlier on in life, while others wait until their 30s or 40s, when they're more financially stable.
While there's no need to put undue pressure on ourselves to hit certain goals, it does pay to succumb to a healthy dose of peer pressure with regard to retirement savings. According to a recent Bankrate study, Americans across the board think 22 is the ideal age to begin saving for retirement. And frankly, they're pretty much spot-on.
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The case for building savings at 22
For many folks, 22 is right around the age of college graduation, which makes it a viable age to begin building a nest egg. Conceivably, you might land your first full-time job at 22, and once you do, you'll have a means of funding a retirement plan, be it a 401(k) through your employer or an IRA if your company doesn't sponsor the former.
Why the rush to begin building a nest egg at 22? It's simple: It'll give you the longest possible savings window to work with, thus allowing you to use compounding to your advantage. Compounding is the concept of earning interest on interest. When you fund a retirement plan, you get to invest your savings so your money grows. As your savings earn money, you can reinvest those gains year after year to fuel that growth even further.
Now let's say you're able to start saving for retirement at 22, and that you eventually retire at 67, which constitutes full retirement age from a Social Security standpoint for anyone born in 1960 or later. Let's also assume you invest your retirement savings heavily in stocks, which, if you're young, is a perfectly reasonable approach. Here's what your nest egg balance might look like depending on how much money you're able or willing to part with each month:
|
Monthly Savings Amount |
Total Accumulated Over 45 Years (Assumes a 7% Average Annual Return) |
|---|---|
|
$100 |
$343,000 |
|
$200 |
$686,000 |
|
$300 |
$1.03 million |
|
$400 |
$1.37 million |
|
$500 |
$1.7 million |
|
$600 |
$2 million |
Data source: Calculations by author.
Clearly, these numbers paint a pretty compelling picture. That said, contributing to a retirement plan at any level is easier said than done when you're brand-new to the workforce and quite potentially saddled with student debt. Still, if you're willing to make a few sacrifices, you can eke out just enough savings to make an impact on your nest egg down the line.
For one thing, consider moving back home after college rather than pay for housing. In doing so, you'll avoid spending money on rent, utilities, and possibly even a car, depending on whether you're able to share or carpool with your folks.
If that's not an option (or not a desirable one), aim to keep your living costs as low as possible. Rent a 700-square-foot apartment in a walk-up building rather than a 1,000-square-foot apartment in a luxury high-rise with a doorman and elevator. Cook meals at home rather than going out to restaurants, and only get a car if public transportation is non-existent where you live. The more frugal a lifestyle you're willing to lead, the greater your chances of finding money to earmark for savings.
Another avenue you might pursue? Get a side hustle. Currently, 14% of those with a second job do that extra work for the express purpose of funding a retirement plan. If you manage to earn an additional $50 a week from a side gig, you'll have $200 a month to put into your IRA or 401(k), even if your regular paycheck is completely eaten up by expenses.
While Americans think that 22 is the perfect age to begin saving for retirement, the unfortunate truth is that most workers don't start that young. So aim to prioritize your nest egg early on to avoid losing out on the growth opportunities so many Americans forgo. You'll be thankful you did later on.
