Saving for retirement? The best time to start doing it

There’s a million excuses to avoid saving for retirement, and surely you have more than one yourself.  All reasons can be as valid as they are reasonable: what’s the point on saving if you don’t plan on getting to old age; or maybe you don’t have employee benefits, so you really can’t afford to save, and so on.

But as true as this may be, you have to admit that excuses are not enough to justify the fact that we don’t want to get outside of our comfort zone.

The average life expectancy in the US is 78.7 years, but this statistic is measured from birth. If you are older than 30,  your probabilities of living longer increase because you already survived the stage in which you could die from some kind of accident or a specific disease. So there’s a great chance that you’ll live long enough to meet your grandchildren. Under this perspective do you still wonder if saving for retirement is worthy? Hopefully you’ll get wise beyond your years.

Here’s some good news: saving for retirement is not as hard as you think, and it has a lot of pros:

1. In your silver years you can still be completely independent, without living of government subsidies or your children.
2. There are many ways to save for retirement, not everything has to be related with retirement saving funds; many people save to start a business after being retired and live of that income.
3. If you work under the labor fees figurel, you can deduct up 10% of your annual income from your taxes.

When should I start saving?

The answer is simple: as soon as you can. The ideal is to start saving while you are in your 20s, as soon as you are out of college and making money.

This is because your savings grow proportionally to time; the older your savings account is, the longer your money will have to grow. Every year’s returns can start generating its own return every year; this interesting phenomenon is known as capitalization.

The younger you are when you start saving, the better the possibilities of your money generating profits. This in turn would decrease the percentage of income you need to save for retirement.

For example if you start saving at 25, or earlier, you need to save approximately 8.4% of your income, if you don’t have a retirement management fund; 1.9% of your income if you have employee benefits.

Here’s an abstract from the book “What you need to know about money before turning 40”, to use as a guideline:

Let’s go deeper

Fernando is a young guy that short after graduating started saving 30 thousand USD a year, in his retirement savings account. Ten years later he had an accident and he stopped his yearly savings, but his account remained there. When he turned 65, his 300 thousand USD investment reached over 338 thousand USD (assuming a 7% annual interest rate), even when he stopped his savings after 35.

On the other side there’s Alejandra. Alejandra didn’t worry about her retirement management fund or her retirement savings account until she was 35. She also saved 30 thousand USD a year, the difference is that she did it for a period of 30 years. When she turned 65, she had saved  900 thousand USD of her own money, an investment that will only yield 303 USD in returns, assuming the same 7% annual interest rate. That’s a big difference in returns over investment.

Which savings strategy would you prefer?

Saving for retirement, and the future in general, might seem like a postponable investment; it just looks so far, and there are things we need and want now. But no one is responsible for us but ourselves, and in the future we will also have needs, but we might not be as healthy or capable. You just have to ask yourself, how do I want to spend my retirement years?