How to plan for retirement—why starting early matters

Your retirement may be years, or even decades, away—but the sooner you start saving money, the better prepared you’ll be for the future you have in mind.

Start saving for retirement today

Your employer’s retirement savings plan offers one of the best ways to get going, and when you start early, there's more time to build your retirement savings. It could make a difference totaling hundreds of thousands of dollars—or more.

The important thing is to start today; for example, if you put away $6,500 each year starting at age 25, you could have more than $800,000 by the time you’re 65, assuming an annual return of 5%. If you don’t start saving that money until you’re 35—just 10 years later—the amount you’d have at retirement is cut almost in half, and it’s another 50% reduction if you don’t start until age 45, another 10 years later. That's the advantage of making contributions over a longer time and the power of compound earnings.

Chart showing example of starting to save at age 25 vs. 35 vs. 45 and the corresponding lower amounts the saver would have at retirement

This is a hypothetical illustration only, and there are no guarantees that the results shown will be achieved or maintained over any time period. It assumes no withdrawals and does not take into account any fees associated with the investment.

How much should you be saving for retirement?

The amount you’ll have at retirement depends substantially on you. Consider choosing a higher contribution percentage to potentially get more earning power from the start. If your employer's retirement plan offers auto increase (and many plans do), consider enrolling to have your contribution percentage increase annually. It’s your choice.

To get a better idea of which savings strategy might make sense for you, take a minute to use the contribution calculator. Calculators can help you get started, but you’ll also want to consider other factors, such as your anticipated Social Security benefit, expected age at retirement, other financial needs, and your long-term health outlook.

When you take into account the average Social Security benefit of less than $18,000 per year,1 the number of years you could be in retirement (today’s 65-year-old is likely to live another 20 years),1 and anticipated healthcare costs ($285,000 for a couple retiring today),2 there’s a chance you’ll be counting on your retirement savings to meet the majority of your expenses in retirement.

Your retirement plan helps make it easy

There are lots of advantages to saving through your employer's plan:

Convenience—The money you’re saving goes right from your paycheck to your retirement plan account. With each paycheck, automatic contributions give your retirement savings a chance to build. 

Extra money—Many employers match contributions up to a certain percentage. If you’re not taking advantage of your employer’s match, you’re leaving money on the table.

Flexibility—You control the percentage of pay you save through your retirement plan. Even if you’ve been automatically enrolled, you can change your contribution amount. IRS limits for 2020 let you contribute up to $19,500 annually. If you’re 50 or older, you can contribute up to $6,500 more each year with the catch-up feature.

Power of compounding—You may earn money on your contributions, your employer’s contributions, and any earnings that go back into your account, potentially generating more earnings. Over time, compounding can make a substantial difference. 

Tax savings now—Your contributions are taken out before taxes if you’re making traditional contributions, which means your taxable income could be less, saving you money now. There’s even a Saver’s Credit on income taxes for lower-income employees.

Tax savings later—Your retirement plan savings grow tax deferred, so your money and any earnings aren’t taxed until withdrawal, ideally at retirement, when your tax rate is lower.3

Getting an early start can have a significant impact on the growth of your savings down the road, but it’s also important to remember that it’s never too late to start saving!

1 "Social Security Fact Sheet," Social Security Administration, June 2019.  2 “Estimates for Health Care Costs in Retirement Continue to Rise,” PLANSPONSOR, April 2019. 3 Ordinary income taxes are due at withdrawal. Withdrawals before the age of 59½ may be subject to an early distribution penalty of 10%.

The content of this document is for general information only and is believed to be accurate and reliable as of the posting date, but may be subject to change. It is not intended to provide investment, tax, or legal advice (unless otherwise indicated). Please consult your own independent advisor as to any investment, tax, or legal statements made herein.