When to Start Saving for Retirement

Image: When to Start Saving for Retirement

There's an old, well-known adage that says, "There’s no time like the present." We've all heard the phrase at one point or another, and while it probably wasn't referencing when to start saving for retirement the first time it was uttered, it may as well have been.

When saving for retirement, two important factors come into play: money and time. The industry tends to focus more on the financial aspect—constantly pointing to the disastrous effects of too-low contribution levels on retirement outcomes. However, time is arguably more important. The sooner you begin to save for retirement, the more time your money has to grow. And the more time your money has to grow, the more time compounding interest has to do its thing: grow your nest egg.


How early should you start saving for retirement?

When it comes to deciding at what age you should start saving for retirement, there’s no time like the present. Whether you’re 22 and just got your first job or you’re 55 and are seeing the light at the end of the proverbial career tunnel, if you don’t have anything stashed away for retirement, now is the time to start saving.

But why should someone right out of college worry about putting away money for retirement, which could be 40 years down the road, when expenses like rent, groceries, and student loans are knocking on their door right now? Again, it’s not about how much—it’s about how long.

It all boils down to one simple mathematics principle: compounding interest.

Remember when your elementary school teacher asked whether you would end up with more money after a year if you earned one dollar per day or if you earned one penny on Day 1 and doubled your money each day thereafter? You were probably shocked to learn that you’d be better off at the end of the year by choosing the penny option; and even though it’s highly unlikely your assets will double in value each and every day when saving for retirement, the effect is similar.

Compounding interest happens when the funds you contribute to your retirement plan earn interest, eventually growing to an amount large enough to begin earning interest on itself—creating a snowballing effect that can significantly grow assets over an extended period of time. And the earlier you start saving, the earlier compounding interest can start accruing and the higher likelihood you have of reaching your retirement goals.

Let’s break it down.

Why it’s important to save for retirement as soon as you can

Say you choose to start saving for retirement at age 25 and decide to contribute $3,000 per year to your job’s 401(k) plan for the next ten years. If you decide to never contribute another cent to your retirement fund once you reach the age of 35 (which we don’t recommend doing) and plan to retire at 65, your funds will have 30 years to grow. Assuming 7 percent annual growth, your $30,000 in contributions will grow to almost $315,500 by the time you retire.

Read more: How much should you save for retirement?

Now let’s say you prioritize paying student loans off right out of college and decide to delay saving for retirement until age 35—just ten years later than in the first scenario. You again decide to contribute $3,000 per year to your retirement account, but this time you choose to save for 30 years, instead of just ten, to make up for the time you lost. When you reach your retirement at 65, your $90,000 in contributions will have grown (again, assuming 7 percent annual growth) to roughly $306,000. So, despite the fact that you contributed to the account for an extra 20 years—putting in an additional $60,000—you still end up behind. That’s the power of compounding interest. That’s the power of saving early.

Using Compounding Interest to Save for RetirementUsing Compounding Interest to Save for Retirement

Review the chart below to understand how utilizing different saving strategies can impact the effects of compounding interest and affect total account balances over the course of a career.

  Saver 1 Saver 2
Start saving at age: 25 35
Saving for: 10 years 30 years
Yearly contributions: $3,000 $3,000
Total contributions: $30,000 $90,000
Assets at age 65:1 $315,500 $306,000

1Assume a 7% annual return


  • WIth Compound internest, it's not about how much you save, it's about when you start saving.

Common reasons Americans aren't saving for retirement

Clearly, compounding interest benefits savers by rewarding them with snowballing returns over the course of a career. So, it only makes sense to begin saving for retirement as soon as possible, right? In theory, yes—but many Americans are bogged down by the high cost of living, debt, medical costs, etc., which can make it hard to prioritize retirement savings.

But the truth of the matter is this: healthcare and medical costs likely won’t decrease as we age, and with skyrocketing inflation levels over the last several years, the cost of living isn’t likely to decrease either. And with Social Security benefits designed to only replace a portion of pre-retirement income, prioritizing saving for retirement early and often becomes much more paramount.

Today’s employees need to utilize a multi-faceted approach when saving for retirement, combining personal savings with Social Security benefits with savings from an employer-sponsored retirement plan like a 401(k). And luckily, there are easy ways to get started—even on a tight budget.



3 easy ways to start saving money for retirement

If you're ready to start safeguarding your financial future, there are a variety of easy ways to begin putting away money without adding significant stress to your wallet or bank account.

  1. Start today

We already talked about the power of compounding interest and how it can benefit those who save as early as possible, but starting today is important for another reason as well. Common sense tells us that the sooner we start saving, the more time we have to save. And when we have more time to save, our contributions don’t need to be quite as high each month or year to reach our retirement goals as they would be if we don’t start saving for many years to come. Saving even just $50 per month now will help build a solid foundation for retirement and may help you avoid the need to save significantly more per paycheck down the road just to help you catch up.

Saving for something that’s so far off in the distant future may not seem worth it when you’re already juggling multiple financial responsibilities , but there will never be a “perfect” time to start saving money for the future. Paying your future self should be just as important as paying your bills or other necessary expenses now, and should be more important than “treating yourself” to new toys or gadgets you don’t need. There are going to be challenges from the get-go, and there may even be months where you can’t afford to save as much—such as when an unexpected expense, like a car repair, pops up. But push through any and all challenges you face, and you’ll be rewarded for your efforts with a financially-secure retirement.

  1. Contribute to a 401(k) or similar retirement plan

People are more likely to save for retirement when they have access to some type of employer-sponsored retirement savings plan, like a 401(k). So, if you have access to a retirement plan through your employer, start saving in it as soon as you can. Your contributions don’t have to be large or significant either—there’s no shame in saving small amounts if that’s what your budget allows. Any amount of savings is better than none. Just make sure to increase your contribution levels as your salary increases or as you pay off debt—rather than succumbing to lifestyle inflation—to continue growing your nest egg.

If a 401(k) or similar employer-sponsored retirement plan isn’t part of your benefits package, consider opening an Individual Retirement Account (IRA) or similar type of retirement savings account to begin at least saving something.

  1. Determine your risk tolerance

Risk tolerance is essentially the degree of comfortability investors have as it relates to market risk. For example, someone with an aggressive risk tolerance would feel more comfortable weathering through market ups and downs than someone with a conservative risk tolerance. Risk tolerance is often associated with age—younger investors are usually more aggressive than investors approaching retirement.

Have plenty of time to save? Consider utilizing an aggressive portfolio model to maximize potential returns on your investments. Just remember to be realistic about your expectations and at least somewhat un-phased by market changes. Bear and bull market cycles happen all the time, so don’t let a declining market send you running for the hills at first glance. It’s often worth it to “hang in there.”

On the flipside, if you’re quickly approaching retirement, a more conservative model may be a better fit to help protect your assets and nest egg.

Learn more: Choosing your investments: Understanding risk tolerance levels 


Started saving late? How to utilize catch-up contributions

It’s best to start saving as early on in your career as you can, but no one has a time machine to go back and begin stashing away money earlier if they procrastinated a little longer than they should have. Luckily, catch-up contributions exist to help savers who are approaching retirement "catch-up" on their retirement savings. Review the chart below to understand annual contribution limits and how catch-up contributions can help you get closer to retirement readiness.

The most important part of saving for retirement is to just start doing it. Whether you’re fresh-faced out of college or you’re already into your golden years, putting away money right now can only improve your retirement outcomes and the quality of life you’ll experience during retirement. It’s never too early or too late to start saving for the future, so take the small step of saving and enjoy the giant leap of owning your retirement readiness.

If you have any questions along the way, we’re here to help: 888-652-8086.