Why Save for Retirement in Your 20s?

Remember, the longer you wait to plan and save for retirement, the more you'll need to invest each month. While it may be easier to enjoy your 20s with your full income at your disposal, it will be harder to put money away each month as you get older.

When you’re in your 20s, retirement seems like such a distant goal that it hardly seems real at all. In fact, it’s one of the most common excuses people make to justify not saving for retirement. If that describes you, think of these savings instead as wealth accumulation and you shall be able to live a long and prosperous life, even after retirement.

Anyone nearing retirement age will tell you the years slip by and building a sizable nest egg becomes much more difficult if you don’t start early. You'll also probably acquire other expenses you may not have yet, such as a mortgage and a growing family.

You may not earn a lot of money as you begin your career, but there’s one thing you have more of than richer, older folks: time. With time on your side, saving for retirement becomes a much more pleasant and exciting affair.

You’re probably also paying off your student loans, but even a small amount saved for retirement can make a huge difference in your future. We’ll walk through why your 20s are the perfect time to start saving for those post-work years.

COMPOUND INTEREST IS YOUR FRIEND

Compound interest is the number-one reason it pays to start early with retirement planning. If you’re unfamiliar with the term, compound interest is the process by which a sum of money grows exponentially due to interest more or less building upon itself over time.

Let’s start with a simple example to get down the basics: Say you invest Rs.200,000 in a safe long-term bond that earns 6% interest per year. At the end of the first year, your investment will grow by Rs.12,000—6% of Rs.200,000. You now have Rs.212,000

However, the next year you’ll gain 6% of Rs.212,000, which means your investment will grow by Rs.12,720. A little more, but not much.

Fast forward to the 39th year. Using this handy calculation tactic you can see that your money has grown to around Rs.1,940,701.50. Go ahead to the 40th year and your investment becomes Rs.2,057,143.59. That’s a one-year difference of Rs.116,442.09.

Notice that your money is now growing more than three times as quickly as it did in year one. This is how the miracle of compounding earnings on earnings works from the first Rupee saved to grow future Rupees, and anyone can see that, with patience, the investment starts to grow at a rapid pace. This is much better than taking unnecessary risks and investing in unorthodox ventures. The savings will be even more dramatic if you invest the money in a stock market fund or other higher earning vehicle.

Saving a Little Early vs. Saving a Lot Later You may think you have plenty of time to start saving for retirement. After all, you are in your 20s and have your whole life ahead of you, right? That may be true, but why put off saving for tomorrow when you can start today?

If you have access to an employer-based plan, take advantage of it. Most employers will match your contributions, so you'll benefit from having an extra boost to your savings. And with pre-tax deductions, you won't even notice your money is being put away.

You can also put money aside outside of your employer. Let's consider another scenario to drive this idea home. Let’s say you start investing in the market at Rs.10,000 a month, and you average a positive return of 1% a month or 12% a year, compounded monthly over 40 years.

Your friend the same age doesn't begin investing until 30 years later, and invests Rs.100,000 a month for 10 years, also averaging 1% a month or 12% a year, compounded monthly.

Who will have more money saved up in the end?

Your friend will have saved up around Rs.310,584.82. Your retirement account will be a little over Rs.930,509.70 . Even though your friend was investing over 10 times as much as you toward the end, the power of compound interest makes your portfolio significantly bigger.

Remember, the longer you wait to plan and save for retirement, the more you'll need to invest each month. While it may be easier to enjoy your 20s with your full income at your disposal, it will be harder to put money away each month as you get older. And if you wait too long, you may even need to postpone your retirement.

RETIREMENT HORIZON

Your targeted retirement age is usually taken into consideration. This is usually used to determine how much time you have to regain any market losses. Because you are in your twenties, it is presumed that investing a large percentage of your savings in stocks and similar assets is suitable, as your investments will likely have sufficient time to recover from any market losses.

INVEST IN A SAVINGS ACCOUNT

A savings account from your local bank will allow you can deposit and withdraw as much as you want—when you want. Every bank has its own rules, though, which means some may require a minimum balance or restrict the number of withdrawals before they charge.

The other benefit of having a savings account is convenience. You can use a savings account for whatever you need, whether for short-term expenses or longer-term needs. You may be saving to purchase appliances for your home, a trip, or a down payment on a car or home—which is when a savings account will come in handy.

The sooner you begin saving for retirement, the better. When you start early, you can afford to put away less money a month since compound interest is on your side. For Millennials, the most important thing about saving is getting started. Compounding interest benefits those who invest over longer periods the most.”