Money for now, money for later

It's never too early to plan for the future

Posted: Monday, August 29, 2005

While saving for retirement early is certainly a great way to start out your career, many twenty-somethings find the idea of directing their hard-earned cash into a 401(k) a bit worthless. But putting a percentage of your paycheck into a retirement fund can be a worthwhile investment, experts say. It's just a matter of looking at the big picture.

Dr. Irene Leech, associate professor of consumer finance/education at Virginia Tech in Blacksburg, Va., says your options are pretty clear when it comes to deciding if and when to save.

"Start saving for retirement with your very first job, face the need to save a lot more money in the years before retirement, or find yourself unable to afford to retire," she explains. "There is an easy way to show that the person who saves $2,000 per year for the first 10 years they work and lets the money continue to grow throughout their career ends up with more money at retirement than the person who waits 10 years to start and then saves $2,000 every year between then and retirement. The second person invests more money, but it earns less due to the time value of money."

For those reluctant workers, it might be difficult to look that far down the road, but planning ahead is precisely what will make saving pay off in the end. Rob Bennett, author of "Passion Saving: The Path to Plentiful Free Time and Soul-Satisfying Work" (The Freedom Store LLC, $24), says it's for this reason that young workers are often unfairly faulted for not saving more.

"When you are age 25, an age 65 retirement is so far off in the future that the hope of making progress on that saving goal provides little motivation," he explains. "A better approach is to save for goals that can be achieved within five years, achieving higher levels of financial freedom gradually, and holding off on a focus on the goal of financing an old-age retirement until later in life."

Bennett suggests using the "multiply by 25" rule to show that once a fund is built up for any regular expense, it will be covered for life. For example, if you spend $50 a year on magazines, then setting aside $1,250 will cover that expense for life, says Bennett.

Many employers are now making it easier to save for retirement by automatically directing a portion of your income into a retirement fund every pay period. Additionally, some companies offer programs that match a percentage of your contribution.

- Lisa Radke

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