How does saving for retirement work?

Question

I’m 34 and I’m still getting my BA, I don’t have a career yet I just work at a coffee shop right now. A friend of mine who is a few years older sometimes tells me I should start saving for retirement. How? Why? I don’t make much money so I wouldn’t be able to put much away. Is it really something I should worry about right now?

In: Economics

Answer 1

Solid answers here and there seem to be two parts to your question:

1) how does saving for retirement work, and

2) how can you specifically save for retirement considering you don’t make much money.

Others have replied how saving for retirement works and, generally speaking:

* you put money away
* there are various tax incentives to help you both put more money away (ex: 401k) and take money out (via lower tax rates)
* due to compound interest, you generally make a lot more money and the sooner you start, the better even if it’s a small amount.

Here’s an example of how much money you can have at 67 (general retirement age) if you put $20/mo every month and you make 5% average yearly return (being conservative since it’s more like 7%/year). I’m using 400 months of contributions which is a bit more than 33 years:

* you would have contributed 400 months * $20/year = $8,000
* your total with 5% yearly return and compound interest is… $20,525.71 or a gain of $12,525.71, i.e. you more than doubled your investment
* by the way just for fun, if you put in $100/mo then you would have invested $40,000 but your total would be $102,628.54. Compound interest really adds up. Oh and it’s $158,444.33 if you go by the more historical 7% return rate.

Now let’s take your specific case and where you – who doesn’t make much money – can do right now. This might not be popular but I wouldn’t start with a retirement account. I’d have a budget first and if you’re saving any money, I’d make sure that you pay off your credit cards first. That 12%+ interest rate you won’t be paying is a better rate of return for now for you. You should only start putting money into retirement accounts once you have no credit card debt and your other debt is manageable (this excludes a mortgage).