TEXAS, USA — So many things involving money are backwards. For example, you start out young on a job and you are not making nearly as much money as you may someday.
But younger you could really use those extra earnings early in your career, because that is one of the most critical times to start pulling money out of your paycheck and investing in a retirement plan.
Gen Z, this message is especially for you: Your new career may be fun and exciting, but one day you will probably want to be able to stop and smell the retirement roses.
But there may be no such roses and no stopping if you do not have money put away for retirement.
Many young workers haven't been saving for retirement
Bankrate recently surveyed Americans about their retirement savings habits. They found that almost a third of respondents from Generation Z (people born between 1997 and 2004) were making what could become the ‘half-million-dollar mistake’ of putting off retirement contributions.
According to the poll, 31% of people in the Gen Z age group had not saved anything for retirement in the past two years.
Those early dollars you set aside for life after work are especially crucial because they have the longest potential time to sit in investments and grow.
How big of a deal are those early contributions?
How much do early 401(k) contributions matter?
Assuming $5,000 invested per year at an 8% annual return, Bankrate ran the numbers for two scenarios: Starting your retirement investing at the age of 32 versus starting at 22. If you started at 22, they report you would have $72,433 by the time you reach 32. If you started at 32, you would be starting from zero.
Fast forward 10 more years. At the age of 42, the site figures if you started saving at 22, you would have amassed $228,810 versus the $72,433 you would have socked away if you had put aside the same amount of money starting when you were 32.
The graph just diverges further from there. By the age of 62, a person who started saving at 22 has $1,295,283 compared to the $566,416 set aside by a person who started at the age of 32. That is the (more than) half-million-dollar mistake of not starting early.
Some financial wisdom: If you think you cannot afford to pull money from your paycheck at 22, you should know there is a decent chance when you’re making more money at 32, you still won’t think you have enough. And you may even still feel like you cannot spare any money for retirement when you reach 42, 52 and 62.
Saving for retirement may not be as much of a sacrifice as you think
Saving is a sacrifice, but it may not be as big of a burden as it sounds. If you have a traditional 401(k) account, your contributions are pre-tax. Since that money is taken directly off the top, when you are taxed on your paycheck, you are being taxed on less pay, so the amount of tax you pay is less.
You can play with the numbers using a take-home pay calculator, like this one from Fidelity. For instance, it shows that if you make $50,000 per year and contribute 5% to a 401(k) pre-tax, you would add $96 into your retirement account every two weeks. Yet, your take home pay would only go down $72 every two weeks because you would not have to pay as much in taxes.
An important piece of advice: Always at least try to contribute the percentage your employer offers to match.
If they match 3% and you put in 3%, and all the parameters above are the same, you and your employer would now be putting a combined $115 into your retirement, yet that would only cost you about $43 every two weeks.
If you have a Roth 401(k), you are noticing those contributions more because they come out of your check after taxes. But you are not taxed when you withdraw the money after you reach retirement.
Those plans have become popular, but it may be a good idea to read this article and then this one when considering whether a Roth 401(k) is right for you.