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Congratulations, you’ve landed your first full-time job after graduation. During this time, retirement feels like a lifetime away. That can wait until you’re more established, right? It might seem far away, but the best time to start investing for retirement is now. And, it can actually be more beneficial to start saving smaller amounts now versus larger amounts later. Why? The answer is simple: compound interest.
Compound interest allows you to build your savings quickly, because you earn interest on your contributions and on the interest you’ve already earned. Basically, the earlier you start investing, the longer your money has time to grow and accumulate interest. When you’re young, you have time on your side. This means you can contribute less and enter retirement with more money than you would have if you started later.
Let’s say you start investing $300 dollars per month at age 23. Even if you invest this same amount every month for 42 years, by the time you’re 65, you’d have $830,276.06.1 But, you’d only actually contribute $151,200 total throughout those years.
However, if you start ten years later, at 33, and invest $500 per month–$200 more per month–you’d actually come out with less. $168,967.13 less, despite the fact that over your lifetime, you actually invested $40,800 more of your money.
There are a number of ways to do these calculations. Try it out for yourself and plug in your own numbers using the U.S. Securities and Exchange Commission’s free online calculator.
How to get started
Now that you know the benefit of having time on your side when it comes to investing, here are a few types of retirement accounts to help you get started.
Employer-sponsored retirement accounts
Employer-sponsored retirement accounts, like 401(k)s and 403(b)s, can make it easy to start investing. These accounts allow you to make pretax contributions directly from your paychecks, which will grow tax deferred. This means you’re reducing your taxable income now, and you’ll pay taxes later in retirement. Many employers will also match your contributions up to a certain percentage. So, if you can, make sure you contribute at least up to the amount matched; this employer contribution is essentially free money!
Individual retirement accounts (IRAs)
There are a few different types of IRAs, including accounts specifically for those who are self-employed, but the two we’ll focus on today are Roth IRAs and traditional IRAs. As of 2021, you can contribute a maximum of $6,000 total per year to your Roth IRA and traditional IRA, combined.
Roth IRA: When you invest in a Roth IRA, you fund it with money you have already paid taxes on. That money grows tax free, and when you take it out after age 59 1/2, you don’t have to pay any additional taxes. There are income limitations on who can contribute to a Roth IRA, which is why it’s best to start when you’re early in your career and likely making less.
Traditional IRA: Your contributions to a traditional IRA may be able to be deducted on your tax return, thereby reducing your taxable income like a 401(k). If eligible, these earnings can grow tax-deferred until withdrawal in retirement. Unlike with a Roth IRA, there are no income limitations on who can contribute, but if you make over a certain amount, you can’t deduct the contributed amount from your taxable income.
Now that you know the basics, it’s time to take action. No matter which accounts you choose, start investing today, and your future self will thank you.