Financial Planning, Retirement

Retirement Savers Can Benefit From An Early Start

4/23/19 8:00 AM

iStock-626627280.jpgMore than half of Americans expect to work past the traditional age of retirement (65), according to an updated Transamerica survey. However, a substantial generational difference exists, with older respondents typically anticipating a much later retirement than younger respondents. In fact, a 58 percent majority of surveyed Millennials plan on retiring at age 65 or sooner, whereas 69 percent of Baby Boomers said that they “either expect to or are already working past age 65.” The large disparity between the two generations could suggest that younger adults are a bit overconfident in their perceived readiness for retirement.

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An alternative explanation for Millennials’ relatively high level of retirement optimism could be that the median Gen-Y respondent began setting money aside at age 24, well before surveyed Gen-Xers (30) and Baby Boomers (35). This matters because the sooner you begin setting money aside in your career, the more time you will have to invest the funds. Longer investment horizons are very beneficial because they can allow for greater compound growth potential, as well as more time for a portfolio to rebound from the inevitable periods of heightened market volatility. Further, financial advisers will usually provide clients with a projection of how much money needs to be set aside (contributed to an investment account) each year in order to amass a target retirement nest egg. These annual savings requirements can vary dramatically based on how many years are left until a person’s desired retirement age.

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One thing that is certain, though, is that starting to save and invest while you are still young means more time for your assets to grow, which in turn lowers the amount of money that will need to be regularly set aside to achieve your retirement goal, ceteris paribus. The extra time and financial cushion provided by an early start to your old-age saving can also be very useful in the event that you are forced to retire sooner than anticipated, something which a recent Boston College study determined happens to around one in three older Americans. Perhaps most importantly, more employers are now matching their workers’ 401(k) plan contributions up to a predefined ceiling. This “free money” can provide a significant boost to what employees are able to set aside for retirement each year, and the sooner they begin taking full advantage of this powerful workplace benefit the better.

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Sources: Transamerica Center for Retirement Studies, Boston College (CRR)

Post author: Charles Couch

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