Let’s be real; no one thinks about retirement in their 20’s. After all, we only live once, right? We should focus on living our lives to the fullest, creating memories that last a lifetime. But imagine how good our lives would be if we started planning our retirement early. And the best part is, we don’t have to compromise on the fun of our youth.
Here, we’ll explore five reasons why starting your retirement planning in your 20s is critical for achieving financial security and independence in your later years.
Reason 1: The Power of Compound Interest
Compound interest is the profit earned on the original amount invested and the accumulated interest. Simply put, you profit from the principal and the interest earned in the previous years, growing your savings exponentially.
Take two friends, John and Sarah, for example. John invested £1,000 per year at 25 in a savings account with an annual interest rate of 7% until he was 65. Sarah, on the other hand, didn’t start investing until she was 35. She invested the same amount each year in John’s savings account, earning 7% annual interest, until she was 65.
At 65, John’s savings grew to a whopping £316,000, whereas Sarah’s savings amounted to only £161,000. The difference between the two is a staggering £155,000, despite John investing only £40,000 more than Sarah over the 40-year period.
Reason 2: Uncertainty of Social Security
Social Security is a government-run program that provides financial assistance to retired or disabled individuals. It’s funded through payroll taxes, with current workers paying into the system to support current retirees. While it can be a helpful source of income during retirement, it has its limitations and is facing significant challenges in the future.
According to the Social Security Board of Trustees, the program’s trust funds are projected to run out by 2035. This means that without major reforms, the program will not be able to pay out full benefits to retirees. Additionally, the ageing population results in fewer workers contributing to the system to support a growing number of retirees.
Reason 3: Flexibility to Take Risks
When you start investing in your 20s, you have more time to recover from potential losses. The stock market, for instance, is known for its volatility, with sudden drops and fluctuations that cause huge losses. However, over the long term, it has a history of trending upwards, with periods of growth that more than make up for the temporary downturns.
Reason 4: Decreasing Employer Pension Plans
Employer pensions are funds that an employer contributes to a pension plan on behalf of its employees. They grow over time, providing a steady income stream to retirees during their retirement years. However, in recent years, there has been a decline in the prevalence of employer pension plans, leaving many workers with fewer retirement savings options.
One reason for the decline in employer pension plans is the shift towards defined contribution plans, such as 401(k) plans, which place more responsibility on the employee to save for retirement. This shift has forced many workers to save and invest their own money to supplement Social Security benefits.
Reason 5: Achieving Financial Independence Sooner
By starting in your 20s, you have several decades to save and invest, which can significantly affect the amount of money you accumulate over time. Achieving financial independence at a young age provides a sense of freedom and flexibility, as you no longer have to rely on a traditional job or income source to support yourself. It also allows you to pursue your passions and interests without the constraints of needing to earn a paycheck.
It’s never too early to start planning for your financial future. So, take advantage of your youth and start investing today to secure a bright tomorrow for you and your family.