Retirement is the biggest financial goal for most individuals — but their actions don’t always align with this belief. According to research from the Bipartisan Policy Center, while 76% of Americans believe it is important to save for retirement, only 39% have a retirement plan in place. In addition, majorities of households making less than $75,000 per year don’t feel on track to retire when they want to.
Such data is why Ramsey Brock, president of Brock Asset Management, advises all individuals to start planning for retirement as soon as possible. As his insights reveal, early planning can have a significant impact on your future financial health.
You Need to Decide What Retirement Will Look Like
“A big part of why you need to start planning for retirement early is because you need to decide what you want your retirement to look like,” Brock says. “Do you want to retire at age 55, rather than waiting until 65? Do you want to spend retirement traveling the globe, or are you more of a homebody? Then, of course, you also need to plan for things like medical expenses. Determining what you want retirement to look like is the first step in guiding the rest of your planning.”
In addition to considering your lifestyle preferences for retirement, Brock also advises that you consider your preferred approach to investing. Factors like your risk tolerance or sectors that you wish to invest in will also guide your retirement planning strategy.
Meeting with a qualified financial advisor can help you evaluate your retirement goals, investing preferences and current financial situation to begin developing a plan catered to your unique situation. An actionable plan that caters to your current situation while still being flexible enough to account for future changes will help you get on track with your retirement goals.
Take Advantage of Compounding Interest
Regardless of the specifics of your retirement plan, Brock advises an early start to retirement savings to take advantage of compounding interest — the principle that as the money you invest starts earning a return, you can earn interest on your interest.
“Compounding interest is an incredibly powerful asset in saving for retirement,” Brock says.
“Let’s say you start saving just $200 per month toward retirement starting at the age of 25. With a seven percent rate of return, you’d have $479,124 by the time you retired at age 65. But if you wait until you’re 35 to start saving that same amount, you’d only have $226,706 by the time you retire. Time is your biggest ally. The sooner you start saving for retirement, the more your money can work for you.”
With compounding interest, the earlier you start, the more you’ll have in retirement — even if you don’t make as aggressive of contributions. Conversely, the later you wait, the harder it will be to reach your desired savings threshold, even if you make more direct contributions to your retirement accounts.
To ensure that you maximize the power of compounding interest, Brock recommends a consistent, conservative approach. “Don’t try to play the market to maximize your returns. Saving for retirement is a long-term goal that requires a long-term mindset. Making consistent contributions to reliable investment portfolios, regardless of market conditions, is a safe long-term approach that takes the emotion out of retirement planning and makes it a financial habit.”
Starting Early Enables a Flexible Approach
Another advantage of early retirement planning is that it enables a more flexible approach that caters to different investment preferences and financial situations. “When you start planning for retirement early, you have more leeway to make aggressive investment choices,” Brock says.
“This is because at a younger age, you have more time to recoup potential losses that might result from this investment strategy. If this aligns with your risk tolerance, you have more opportunities for these investments early on, as opposed to when you get closer to retirement and your strategy needs to become more conservative.”
Starting early also gives added flexibility in situations when you feel like you can’t contribute much to your retirement savings. Even if you’re only able to contribute $50 per month to your retirement portfolio, that is still better than nothing.
Compounding interest makes those smaller investments more powerful than waiting to make a larger investment later. This can leave more space in your budget for addressing debt or other living expenses so you can still contribute to retirement while working on other financial goals.
This also ensures that as you get closer to retirement, you will have more leeway in how you use your finances for retirement and other purposes, rather than needing to devote an outsized portion of your budget toward trying to catch up on retirement contributions you should have made earlier.
Make Your Dream Retirement a Reality
As Brock’s insights reveal, you have nothing to lose by planning for retirement — but potentially, quite a lot to gain. By developing a clear plan for retirement, you can tailor your investing strategy to your goals and be better able to take advantage of compounding interest to maximize your returns. Even if you can only contribute a small amount toward your retirement savings today, every little bit will add up, especially when you give it more time to grow.
