What is the advantage of investing early for retirement?

Retirement might seem like a lifetime away, especially when you have other priorities, like paying off debt or buying a house. While it makes sense to focus on those first, there are advantages to investing early for your retirement.

With retirement investing, every day offers earning potential. Likewise, minimizing financial mistakes while you’re young will help you make the most of wealth-building opportunities. 

Read on to see why starting a nest egg early works in your favor and tips to help you along the journey.

Benefits of early retirement planning

Investing early for retirement when you’re young can boost your financial security and quality of life in your later years. Here are several advantages to make your future self grateful.

Major tax advantages

The money invested in a defined contribution plan like a Roth 401(k) or Roth IRA investment account grows tax-free. This means you can save up your hard-earned cash without owing taxes on the withdrawals later.

In addition to a 401(k), you can capitalize on other types of tax-advantaged plans, such as IRAs (Individual Retirement Accounts) and HSAs (Health Savings Accounts), to save money. Your money in these accounts can be deducted from your income, lowering your taxable income. 

Compound interest

The money in your investment accounts continues compounding over time, earning you interest on your initial balance, your contributions, and past interest earnings.  This is why compound interest is one of the fastest ways to build wealth.

Tax diversification

Starting early also allows you to diversify or “spread out” your retirement investments across different taxable and tax-free income sources. This strategy helps you reduce your taxable income and keep more money in your pocket. 

Risk tolerance

Being a young investor gives you more time and flexibility to recover from stock market dips. Since riskier investments typically have higher potential returns, you’ll have more time to ride out market fluctuations in your 20s and 30s as opposed to your 40s and 50s.

Financial security

From job loss to medical emergencies, life can throw unexpected curve balls. No matter how secure you feel, having a safety net to fall back on is necessary. Your retirement savings, if started early, can be that safety net. Dipping into your retirement fund before age 60 isn’t ideal, but it may give you options when dealing with unforeseen circumstances. 

Peace of mind

Investing early ensures you’re financially prepared to retire when the time comes. Whether you plan on tackling a bucket list or relaxing in those golden years, you’ll have peace of mind knowing your finances will be in order. 

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Tips for getting started

While many things are out of our control, finances don’t have to be one of them. Here are a few tips to guide you along the way. 

Think long term

Early planning forces you to think about your future. Where do you want to be financially in 20, 30, and 40 years? What life goals outside of work do you hope to accomplish? These may seem like tough questions to answer while you’re young, but doing so will help you make better investing decisions.

Maximize employer benefits

A great place to start is by taking advantage of your employer benefits, where many offer retirement plans, like 401(k)s and SIMPLE IRAs, as well as HSAs. One advantage of workplace investment accounts is that some employers will match your contributions up to a certain percentage. Think of it as a bonus from your boss! 

Get accustomed to saving

Building a nest egg may initially feel like you’re “giving up” a portion of your salary, but it’s the easiest way to create a habit of saving. Over time, you’ll get adjusted to that percentage of your paycheck going into savings, naturally helping you budget to live beneath your means. 

Work with financial advisors

Where you ultimately put your money is up to you, but it’s always a good idea to listen to professional advice. Financial advisors can guide you in the right direction and help set you up for financial success. 

Since your needs fluctuate, it’s difficult to “set it and forget.” With assistance from a financial advisor, you can develop and modify the best strategy for your goals, such as diversifying your income sources and finding opportunities to minimize tax liabilities. 

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The Playbook take: It’s never too late (or early) to start investing

Mapping out your financial retirement plan can become overwhelming and frustrating, especially if finances aren’t your strong suit. If you find yourself pressed for time or unsure of where to start, remember that there are resources available to guide you.

Seeking out a financial planning tool can be a beneficial step in creating a plan that aligns with your personal financial goals, adjusting as your life evolves and your needs change.