The last few years haven't been easy for anyone, but younger Americans have been hit especially hard.
From the housing market boom to rising inflation to student loan payments picking back up later this year, millennials already have a lot on their financial plates. Saving for retirement, then, can feel next to impossible right now.
It's not easy to add yet another financial responsibility to an already long list. But if you start saving for retirement now, it will make your life exponentially easier down the road -- even if you can't afford to save much at the moment.
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Using compound earnings to your advantage
With compound earnings, you're earning returns on your entire account balance -- not just the money you invest. The more your balance grows, the more you'll earn. Over time, then, your savings will grow astronomically.
For example, say you have a goal of saving $500,000 by age 65. If your investments are earning a modest 8% average annual rate of return, here's how much you'd need to invest each month depending on what age you begin saving:
| Age You Begin Investing | Amount Invested Per Month | Total Savings |
|---|---|---|
| 20 | $110 | $510,000 |
| 25 | $170 | $528,000 |
| 30 | $250 | $517,000 |
| 35 | $375 | $510,000 |
| 40 | $600 | $526,000 |
| 45 | $925 | $508,000 |
Data source: Author's calculations via Investor.gov
Saving for retirement is never easy, regardless of your age. But the sooner you get started, the less you'll need to invest each month to reach your goal.
If you don't have hundreds of dollars per month to invest, that's OK. Every little bit counts. Time is your most valuable asset when saving for retirement, and it's far better to save a small amount now than to put it off.
3 simple steps to get started
Even if you know you're ready to start investing for retirement, getting started can still be overwhelming. Fortunately, it's simpler than it may seem to begin investing, and these three steps can put you on the right path.
1. Decide where you want to invest
If you have a 401(k) plan through your employer, that's perhaps the easiest way to start saving for retirement. A 401(k) is an especially smart choice if you have access to matching contributions from your employer, as these contributions are essentially free money.
Not everyone is lucky enough to have a 401(k), however. In that case, you may opt for an IRA instead. IRAs are similar to 401(k)s, except they're not tied to your employer (and you generally have far more investment options).
With 401(k)s and traditional IRAs, your contributions are tax-deductible -- so you'll get a tax break in the year you initially invest, then you'll pay income taxes on your withdrawals. With a Roth 401(k) or Roth IRA, you'll pay taxes on your contributions upfront, but your withdrawals in retirement will be tax-free.
2. Set a savings rate
Next, determine how much you can comfortably invest each month. Again, you don't need to save hundreds of dollars per month to make a difference. If you only have room in your budget for a few dollars per week, that's a great place to start.
Just keep in mind that it's wise to only invest money you can afford to leave in the market for the foreseeable future. Withdrawing your savings from a 401(k) or IRA can result in hefty penalties and taxes, costing you more over the long haul.
3. Keep a long-term outlook
During the first several years after you begin saving, progress will likely seem slow. That's normal. It takes time for compound earnings to work their magic, so don't expect to start seeing significant gains for a decade or two.
While this can be discouraging at times, try your best to stay focused on the future. All your hard work now will pay off down the road, and investing consistently for decades will add up.
For instance, here's approximately how far $100 per month will go over time, assuming you're earning an 8% average annual return on your investments:
| Number of Years | Total Savings |
|---|---|
| 10 | $17,000 |
| 15 | $33,000 |
| 20 | $55,000 |
| 25 | $88,000 |
| 30 | $136,000 |
| 35 | $207,000 |
Data source: Author's calculations via Investor.gov
While it takes time for your savings to start growing, the longer they have to accumulate, the faster they'll build -- which is why it's critical to begin investing as early in life as possible.
If you're a millennial eager to start saving for retirement, you're already on the right track. By investing as much as you can afford right now (regardless of how much or little that may be), you can save more than you might think by retirement age.
