Stages of Planning
You can start to save for retirement as soon as you get your first job. Earned income qualifies you to open an individual retirement account (IRA), and the company you work for may offer a salary deferral plan, such as a 401(k), 403(b) or 457 plan. You can participate in both every year you're eligible.
To open an IRA, you complete an application at a brokerage firm, bank, or other financial services institution, which will act as the account's custodian.
For employer-sponsored plans, you can contact your manager or human resources representative if you're not automatically enrolled. Some employers match a percentage of the amount you deposit into your account, as long as you put in a minimum amount. You'll want to be sure you understand these limits and defer at least enough to qualify for the full match.
Getting Priorities Straight
Though saving for retirement might not feel like a priority when you first start working, it's never too early to begin. In fact, the earlier you begin to save, the more time your assets will be have to compound, or grow, leaving you with more money for retirement.
Consider Investor A, who begins saving at age 22 by investing $3,000 per year for ten years. Though she stops adding to her account at age 32, she keeps the assets invested. Investor B, on the other hand, waits until age 32 to start investing, at which point she puts in $3,000 per year until she turns 62. If both retirement accounts provide an 8% average annual return, at age 62 Investor A would end up with $519,237 in her account while Investor B would end up with $367,038, though she contributed for 20 additional years. This is because Investor A started sooner and was able to take advantage of the effects of compounding for longer.
One rule of thumb suggests allocating 10% of pretax salary each year to retirement. If you can't afford that much, invest as much as you can once you've covered your day-to-day living expenses and paid your bills - even if it means cutting back on your current spending habits.
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