Current popular opinion is to put off retirement savings until later years when all debts are paid off and family responsibilities are reduced. Then, when you reach your prime earning years between ages 45 and 65 you can start seriously saving and catch up.
What do you see in your crystal ball?
The prime earning years, unfortunately, can also be the prime years of suffering a disability, serious illness, or even job loss. Instead of living in a high-income bracket you could be on disability payments, or working at a lower salary, or otherwise unable to put aside any money for the future.
Starting young is best
A better approach is to save as much as possible starting in your 20’s when the money has the longest time to grow.
Related: The best time to start saving is now
You may have reduced contributions the first few years, but if you stay invested for the long term and keep making regular contributions you’ll eventually be in a better position to withstand job losses or other interruptions to your ability to save.
If those setbacks don’t happen you’ll have the option of retiring earlier if you want.
If your company has a retirement/pension plan and they match your contributions it’s a no-brainer to take advantage of it, even if you don’t think you’ll stay with them long. That is what I thought, and I’ve regretted my decision ever since.
Don’t underestimate the power of long term compounding. It works in your favor. Due to decreased income, I stopped making RRSP contributions about twelve years ago. This is not to say I neglected my portfolio during this time. I changed some of my holdings, re-invested dividends, and even made a few withdrawals and my balance today has still increased over 320% from the date of my last contribution.
Paying debts first
Should you pay high interest credit cards off first? You should do what you can to reduce these interest costs but if you wait until you pay off all your debts before saving for retirement, and then never manage to pay it all off, one day it will be time to retire and you will be completely unprepared – and, perhaps still in debt.
High interest credit card balances should be dealt with as soon as possible, but what about your mortgage?
I don’t understand the current mania to pay off a mortgage in 10 years or less when mortgage interest rates have been the lowest they’ve ever been for several years now.
If you pay off your debts while simultaneously saving for retirement you’ll end up on stronger footing than you would otherwise be.
The cost of waiting
While it’s never too late to start saving for retirement, putting it off too long can take a big bite out of your nest egg – or your monthly income. People have the idea that you can put off retirement savings and somehow catch up later. Catching up though can become increasingly difficult the longer you wait.
Related: What are you saving for, anyway?
Maybe, once the kids have left home to start their own lives and your mortgage is just about paid off, you might want to spend a little more on luxury grocery items, entertainment and new hobbies that interest you, rather than putting every penny of discretionary income into savings.
Final thoughts
It’s becoming increasingly necessary for people to take responsibility for their future retirement needs as well as managing their current financial needs.
A retirement plan should be as much a part of your budget as your mortgage or rent payment, cell phone and auto expenses, whatever your age.
Remember, if you plan to start later, later may never arrive.
