When you're in your 20s, retirement is probably the last thing on your mind. You may think you don't have enough money to start an individual retirement account, or you don't have to worry about retirement until you are older.
However, there is never a better time to start your retirement fund than in your 20s, and it is actually a lot easier than you probably think it is. Here are reasons why a retirement fund can benefit you, right now and in the future.
Contributions are made pre-tax
First, IRA contributions are pre-tax contributions. This may not seem like a big deal to you if you are not making a lot of money to begin with, but it means that you can start saving for retirement without a large initial outlay. In fact, if you have your IRA contribution automatically deducted from your paycheck, you might not even notice the difference. If your employer matches your contribution, that's free money to you!
Start now and retire with more
Speaking of free money, compound interest on IRA accounts favors the young, and if you start saving now, your returns at the end of your investment could actually be six times as much as someone who starts saving in their 30s or 40s.
How does that work? Well, let's say that youre 20 years old, and you put $2,000 into your IRA every year for 20 years. (That's about $38 a week). After 20 years, let's say you stop making contributions but leave the money in your IRA where it produces tax-free returns of 10% a year. Your investment over 20 years was only $40,000 of your own money. But by the time you are 65, youll be a millionaire. Thats right: at 10% interest, you will have an account thats worth $1,365,227, simply through the magic of compounded interest over time. If you had started the IRA at age 40, even if you contributed the same amount of money for 25 years, you'd still have less than $300,000.
So as you can see, it pays to start early when it comes to retirement planning. Don't wait until you are in a rocking chair to start thinking about growing your savings.
