When you’re early in your career, retirement can feel like something that belongs much further down the road.
There are plenty of financial priorities competing for your attention right now. You may be paying student loans, covering everyday expenses, saving for a home, starting a family, or simply getting established in your career.
But when it comes to preparing for retirement, younger workers have something especially valuable on their side: time.
You don’t need to have your entire financial future figured out in your early career. What you can do is begin to understand where you are, develop good financial habits, and create a plan that can evolve as your life changes.
Start With a Simple Question
Ask yourself:
What percentage of my paycheck is currently going toward my future?
That might include contributions to an employer-sponsored retirement plan, an IRA, or other long-term savings.
If you don’t immediately know the answer, that itself gives you a useful place to start.
Take a look at what you are currently contributing, what accounts you have, and how those savings fit alongside your other financial priorities.
Remember, the goal isn’t to have a perfect number. It’s to become more aware of what you’re doing right now, so you can improve it over time.
Why Starting Earlier Can Matter
One advantage of beginning to save and invest earlier is that your money has more time to potentially benefit from compounding.
Compounding generally refers to the ability of investment earnings to generate additional earnings over time. Of course, because investment returns fluctuate and losses are possible, compounding does not guarantee a particular outcome. But time can help to absorb the uncertainty of this environment.
The larger lesson is simpler: time is a resource you cannot get back.
Starting earlier may also give you an opportunity to establish the habit of regularly setting money aside.
Your contribution amount doesn’t have to remain the same throughout your life. As your income, expenses and priorities change, you can revisit what you are saving and determine whether adjustments make sense along the way.
A financial plan created at 25 probably shouldn’t look exactly like one created at 35, 45 or 55.
Your life changes. Your plan can change with it.
Give Your Money a Plan
One of the most useful things you can do early in your career is understand where your money is actually going.
Budgeting guidelines, such as dividing income among needs, wants and savings, can provide a starting framework. But there is no single percentage or formula that is appropriate for everyone.
Housing costs, debt, family responsibilities, income and personal goals can all affect how someone chooses to allocate their money.
Instead of focusing on a perfect formula, consider three basic questions:
- How much of my income is covering essential expenses?
- How much am I spending on discretionary purchases?
- How much am I setting aside for short-term and long-term goals?
Looking at your actual numbers can tell you far more than simply saying, “I have a budget.”
Consider Saving Before Spending
Another approach is to make saving part of the plan before deciding what is available for discretionary spending.
For some people, automatically directing a portion of each paycheck toward savings or retirement can make consistency easier. The appropriate amount will depend on your individual circumstances, and there may be times when other financial priorities need attention as well.
The important part is being intentional.
Rather than waiting to see what’s left at the end of the month, decide how saving fits into your overall financial picture first.
Investing Is About More Than Choosing Investments
When people think about retirement planning, they often jump immediately to the investments themselves. But there are other questions to consider.
How much are you contributing? How regularly are you contributing? What is your time horizon? How much investment risk are you comfortable taking? Does your investment allocation reflect your goals and circumstances?
Investing involves risk, including the possible loss of principal, and different investments carry different types and levels of risk. So understanding both your goals and your comfort with investment risk can be an important part of building a long-term strategy.
What Are You Actually Building Toward?
Retirement planning isn’t only about reaching a particular account balance. It’s also about deciding what you want your money to allow you to do.
For one person, retirement may mean leaving the workforce as soon as financially practical. Someone else may want to continue working because they enjoy their career. Others may hope to travel, spend more time with family, support charitable causes, pursue interests they didn’t have time for during their working years, or simply have greater flexibility in life.
That leads to a different question:
What does financial security mean to you?
Understanding what you are working toward can help provide context for the financial decisions you make along the way.
Start Where You Are
Financial planning can feel overwhelming when you look at everything at once. So don’t.
Start where you are today.
Understand what you own and what you owe. Look at your current savings and retirement contributions. Review where your paycheck is going. Think about the goals that matter to you and have conversations with the people who are part of those plans.
Then focus on the next manageable step.
You don’t have to build your entire financial future in one day. The goal is to begin developing habits and making informed decisions that can evolve with you throughout your career and your life.
Start where you are. Learn what your numbers are. And give yourself the opportunity to adjust along the way.
This material is provided for educational and informational purposes only and is not intended as individualized investment, tax or legal advice. Investing involves risk, including the possible loss of principal. Individual circumstances vary, and financial planning and investment decisions should be based on your specific situation.
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