I'm 50 Years from Retirement. Do I Have to Fund My 401(k) Yet?

It might seem contradictory to plan for retirement when your career is just getting started. Retirement is a long way off for people in their 20s, and with many younger employees paying off debt or saving to buy a home, putting aside money for a life stage more than 40 years away might not feel like a priority.

A Vanguard study found that while employees under 25 have saved an average of $6,264 in their workplace retirement plans and their 25- to 34-year-old counterparts have saved an average of $37,211, it's not enough for most to reach their retirement goals.¹That's why saving now—and saving a specific amount each pay period—can set you up for a successful future.

When to Start a 401(k)

Your 20s are the best years to begin saving for retirement, and you can benefit even more than someone who begins saving in their 30s. Creating a retirement strategy now can make a significant difference in your retirement account when you reach your mid-to-late 60s compared to those who wait longer.

Not only will you enjoy the money you contribute, but you'll also have more money thanks to years of matching funds from your employer and growth from compound interest.

Why to Start a 401(k) Sooner Than Later

Here's why you should try to sign up for your employer's retirement plan as soon as possible.

1. The cost can be minimal

Maybe you think you can't afford to save for retirement with more immediate expenses looming each month. You'll start next year, or maybe in your next job. After all, you won't be retiring for another 30, 40 or even 50 years—you have plenty of time, right?

That might be true in theory, but it's important to start good savings habits early. The longer you wait, the harder it can be to start, and you'll potentially lose out on years of savings that will make a difference when you're ready to retire.

While there are annual limits to how much you can contribute,² there's no minimum percentage you can designate from each paycheck. You can contribute as little as 1% to 5% of each paycheck to your retirement fund, and because the money is deducted before you get paid, you won't ever notice it's gone. There are tax benefits as well—your contributions reduce your taxable income, and you don't have to pay taxes on your funds until the money is withdrawn.

Although it's advised to contribute enough from each paycheck to take full advantage of your employer's matching funds, you can put in little as 1% if you're truly in a cash crunch. That way, you can still save and benefit from matching funds and compound interest (more on those below). As your financial situation improves, make sure to contact your benefits advisor to raise your contribution so you can receive the maximum in matching funds.

2. You can get "free money" in the process

Matching funds might be one of the few examples of “free money" that exist in the personal finance world. To encourage employees to save for retirement, employers often match a percentage of their employees' contributions, up to a certain maximum.

Most employers will match up to 5% of your contribution, but some match even more as an incentive to employees who stay with the company for a certain number of years. Others might give more to older employees to help them “catch up" on their retirement savings.

Here's an example: If you get paid weekly and contribute $50 per week, you'll have at least $200 in your 401(k) plan at the end of the month. With matching funds from your employer, your total jumps to $400.

Repeat this process over time, and your retirement fund will have significantly more than the amount you personally contributed over a 40-year period, as detailed in the chart below.

Monthly contribution	Number of years to save	Estimated interest rate	Total amount contributed	Future value by age 65
$200	40	7%	$96,000	$479,124.27
$400 (your $200 + $200 from your employer)	40	7%	$192,000	$958,248.54

Source: Investor.gov

The lesson: Don't leave money on the table by not contributing enough to your employer-based retirement fund, or not contributing at all.

3. Tap into the power of compound interest

We know that the earlier you start saving, the more money you'll have to finance your future goals. What might not be as evident is how much compound interest benefits younger savers compared to those who begin later.

The funds in your 401(k) will be invested in a combination of stocks, bonds and other assets designed to provide a healthy rate of return over time. Interest is added to the principal and continues to be added onto new funds contributed to the account and past interest gained.

This process is called compounded interest, and the more cycles you have for your interest to compound, the more your funds will grow. Repeat the process over a 40- to 45-year period, and it equals significant funds gained without additional contributions on your end.

Compound interest calculators can help you see the benefit of saving early. You can input your current or projected age when you open your account, your initial investment, projected contributions over time and an estimated interest rate to calculate how much you'll have at a certain age.

The results can be eye-opening—a person who saves a smaller amount per pay period at 25 can contribute less over 40 years and end up with more money by 65 than a person who contributes a larger amount per pay period but doesn't start doing so until age 40.

Age at first investment	Monthly contribution	Number of years to save	Estimated interest rate	Total amount contributed	Future value by age 65
Age 25	$400	40	7%	$192,000	$958,248.54
Age 40	$1,000	25	7%	$300,000	$758,988.45

Source: Investor.gov

The Bottom Line: Time is on Your Side

If you've just entered the workforce, it might be hard to think about putting aside money for retirement.

Even if you think you can't afford to enroll in a 401(k) plan now, you shouldn't hesitate to get started. You don't have to contribute much, but whatever you save now will grow quickly when combined with matching funds from your employer and compound interest. As savvy investors know, the most important factor isn't timing the market, it's time in the market!

 

Shannon Shelton Miller is a writer living in the Midwest who enjoys finding stories at the intersections of health, beauty, sports, business, history and culture. A writer and journalist for more than 25 years, her work has appeared in numerous national websites and publications.

LEARN MORE: how to set priorities for savings at any age.

 

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