At this point, we're only a couple of weeks into 2024. And hopefully, this means that you're managing to uphold your financial resolutions for the new year so far.
A recent Ascent survey found that paying off debt was the most popular New Year's resolution among respondents for 2024, followed by saving for a milestone like having a child or buying a home. Saving for retirement, on the other hand, was a goal only 7% of respondents said they were aspiring to.
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Now on the one hand, it's easy to see why a goal like paying off debt might trump funding a 401(k) or IRA. If you're staring at a credit card balance with a 20% interest rate attached to it, you're going to want to do your best to knock out that debt as soon as possible. Similarly, if you have no money (or little money) set aside for emergency expenses, then it's easy to see why you'd first work to boost your short-term savings and then focus on long-term savings.
But if you don't have pressing high-interest debt or an emergency account that's sorely lacking in funds, then it's a really good to make saving for retirement your No. 1 goal in 2024. Doing so could really help you avoid a major financial crunch later in life.
You're going to need savings to get by
A lot of people think they don't have to worry about retirement savings so much because they can either fall back on Social Security or catch up later in life. But both lines of thinking are pretty flawed.
First of all, Social Security will only replace about 40% of your pre-retirement income if you're an average earner. And that's based on the extent to which benefits are payable today.
Remember, Social Security is facing a financial shortfall that could result in benefit cuts down the line. If those come to be, the program might provide you with even less replacement income once your career comes to an end.
Also, it's easy to tell yourself you'll focus more on retirement savings once that milestone is closer. But that means you could lose out on years of compounded returns in your IRA or 401(k) plan.
In fact, let's say you fund either account to the tune of $5,000 at age 25. By age 65, that $5,000 could be worth over $108,000 if your portfolio delivers an average annual 8% return, which is a bit below the stock market's average. But if you save $5,000 at age 55, 10 years of growth at that same return leaves you with just under $11,000.
Of course, to be clear, funding a retirement account is something you should aim to do every year -- not just one year, or this year. The point, however, is to illustrate that the longer you give your money to grow, the larger a balance you may be looking at. And so that's a good reason not to put off retirement savings for too long.
There are tax breaks to think about also
When you contribute money to a traditional IRA or 401(k) plan, you shield some of your income from the IRS. So that's another benefit of prioritizing your nest egg this year.
Now with a Roth IRA or 401(k), your contributions don't go in tax-free. But you set yourself up for tax-free retirement withdrawals. So there's a big benefit to funding one of these accounts if you can afford to forgo up the up-front tax benefit.
