If you are a young adult just starting your first job, chances are you face a number of different challenges. College loans, rent, and car payments all may be competing for your hard-earned yet still entry-level paycheck. How can you even consider setting aside money in your employer-sponsored retirement plan now? After all, retirement is decades away–you have plenty of time, right?
Before you answer, consider this: The decades ahead of you can be your greatest advantage. Through the power of compounding, you can put time to work for you. Compounding happens when your plan contribution dollars earn returns that are then reinvested back into your account, potentially earning returns themselves. Over time, the process can snowball.
For example: Say at age 20, you begin investing $3,000 each year for retirement. At age 65, you would have invested $135,000. If you assume a 6% average annual return, you would have accumulated a total of $638,231 by age 65 before taxes and inflation. However, if you wait until age 45 to begin investing that $3,000 annually and earn the same 6% return, by age 65 you would have invested $60,000 and accumulated a total $110,357 before taxes and inflation. Even though you would have invested $75,000 more by starting earlier, you would have accumulated more than half a million dollars more overall.1
That’s the power you have as a young investor – the power of time and compounding. Even if you can’t afford to contribute $3,000 a year ($250/month) to your plan, remember that even small amounts can add up through compounding. So enroll in your plan and contribute whatever you can, and then try to increase your contribution amount by a percentage point or two every year until you hit your plan’s maximum contribution limit. As debts are paid off and your salary increases, redirect a portion of those extra dollars into your plan.
Finally, time can offer an additional benefit to young adults—the potential to withstand stronger short-term losses in order to pursue higher long-term gains. That means you may be able to invest more aggressively than your older colleagues, placing a larger portion of your portfolio in stocks to strive for higher long-term returns.2
The CFS* Financial Advisors here at Elevations Credit Union are always available to help you navigate these important considerations and decisions. Please give us a call at 303-443-4672 x2240 to set up a complimentary, no-obligation appointment. Let us help you make sure that everything is in place and your retirement plan is functioning as it needs to!
1 This hypothetical example of mathematical principles does not represent any specific investment and should not be considered financial advice. Investment returns will fluctuate and cannot be guaranteed.
2 All investing involves risk, including the possible loss of principal, and there can be no assurance that any investment strategy will be successful. Investments offering a higher potential rate of return also involve a higher level of risk.
Non-deposit investment products and services are offered through CUSO Financial Services, L.P. (“CFS”), a registered broker-dealer (Member FINRA/SIPC) and SEC Registered Investment Advisor. Products offered through CFS: are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the credit union, and may involve investment risk including possible loss of principal. Investment Representatives are registered through CFS. The credit union has contracted with CFS to make non-deposit investment products and services available to credit union members. For specific tax advice please consult a qualified tax professional.
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