Saving for retirement involves a series of choices. You must decide which retirement accounts to use and how much to contribute monthly. You need to choose a Social Security claiming age and determine how much you can safely withdraw per month in retirement. You also have to decide how to invest your money and figure out when you can afford to retire.
There are a lot of moving parts, and they all contribute to the whole. This can make it difficult to pinpoint which decisions affect your nest egg the most. But in my case, I know there's one thing in particular I did that has gone a long way toward improving my retirement readiness.
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Starting early has made my job a lot easier
I graduated college a year earlier than most, and it gave me a slight head start in my career. This helped me gain valuable experience and enabled me to begin saving for retirement pretty young.
I opened a Roth IRA when I was just 20 years old. Those first few years, I was unable to contribute all that much. There were even times when I couldn't contribute anything because my salary wasn't that high and I had other financial goals to save for. But every time I had the chance, I stashed a little bit of money away for the future.
In total, my contributions throughout my early 20s probably amounted to only a few thousand dollars. At that time, it was only enough to cover a couple of months of living expenses, tops. But that was then.
That money has already been invested for over a decade and has grown quite a bit. Even better, it's probably got another three decades to remain invested before I need to tap it.
A $5,000 sum invested for 40 years and earning an 8% average annual return during that time will be worth over $108,000 when it's all said and done. Most people could live off this for a few years when paired with Social Security.
My later retirement contributions will also increase in value, but they probably won't be worth as much as those few early contributions simply because they won't be invested for as long. I rank those first Roth IRA contributions I made as one of the smartest retirement planning moves I've ever made.
How to build your retirement savings habit
If you're already saving regularly for retirement, that's great. If not, start as early as possible. Even if you can only save a few dollars per month, it's still worth doing.
The only time it's not a good idea to prioritize retirement savings is if doing so would leave you unable to pay your bills in the present or if you have high-interest debt. In the latter case, paying this off before moving on to retirement savings is best to minimize the interest you'll owe your creditors.
If you haven't already done so, determine how much you need to save for retirement. Once you have a monthly savings target, try to get as close as you can. Those who cannot save as much as they'd like right now should take pride in saving what they can and aim to increase their contributions whenever they get a raise or by 1% of their salary annually. That's just $50 more per month for someone earning $60,000 per year.
Even following the above steps, saving enough for retirement can still be a daunting task. So, be prepared to adapt along the way. You might have to rethink your retirement timeline or remain part-time in the workforce indefinitely to make ends meet if you're unable to save as much as you'd like.
On the flip side, if you can save a lot of money for retirement, stay mindful of your retirement account's annual contribution limits and, for Roth IRAs, income limits. Exceeding these can trigger costly tax penalties. Also, remember that contribution limits increase over time, so you may be able to set aside more money for retirement in future years.
