Saving for retirement is a huge undertaking, and if you feel overwhelmed by it, you’re not alone. That’s why we’re focusing on how to get your long-term savings and investments on track, with a three-part series this week. In this piece, we explore why habit formation is so important. Later, we will tackle why there is no one-size-fits-all solution when it comes to saving for the long-term. And finally, we will get into how streamlining your retirement portfolio with the help of an individual retirement account (IRA) can potentially help you reach your goals.
The New Year can be a great time to start a new habit. So how about this: Get your retirement savings on track this January. We know that saving for something that may feel as far off as retirement can be tricky, especially given the rising cost of living and a fear of missing out on living in the present. Not to mention demands such as debts that need to be paid off, child care, or other financial obligations that may make it difficult for you to prioritize saving for a future that’s still decades away.
But here’s the thing – making saving for retirement a habit early on can actually save you money in the long run. Here’s how.
Time Is Your Most Valuable Asset
If you’re saving for the long-term, time is without a doubt your most valuable asset. The sooner you start to put money away, the more time your money has to work for you.
Here’s what we mean when we say that: The broadest measure of the U.S. stock market, the S&P 500, on average returns about 7% annually, adjusted for inflation. (This percentage is based on historical data and thus only denotes a potential. As time and market conditions change, S&P 500 performance may differ.) As you save and your investments grow in value, any additional cash you put towards your nest egg helps it grow in the future. You can think about it like a snowball effect.
That means every incremental dollar you save has the potential to be much more than that a few years down the line. That’s the phenomenon of compound growth. And the longer you’re invested, the more the power of compounding can work in your favor. With that said, investing always bears some risks; understanding these risks and your own tolerance for them can help you navigate your investments.
Let’s look at an example that shows just how much cash you can save by taking advantage of this dynamic: Someone who starts saving for retirement at 25, putting away $500 per month, could see these total savings of $240,000 grow to more than $1 million by the time they’re 65 based on the average annual S&P 500 return of 7%. But if this person delays regular retirement savings until they’re 35, their monthly contribution would need to be $833 for a total of nearly $300,000 to achieve the same outcome. And that’s how starting early matters can save your actual dollars down the line: in this example a whopping $60,000.
Good Habits Die Hard
So much in financial wellness is about consistency. Whether it’s about tracking your spending, paying down debt, or putting money away for a rainy day, consistency can make or break your success. Saving and investing for retirement is no different.
The sheer amount of money you’re trying to accumulate for a comfortable retirement can make you feel like whatever you’re doing isn’t enough to get you there. Regardless of how much you can save each month, consistency and compounding can help you reach your goal. Putting a much more manageable amount of money towards your savings every month may still potentially pay off over time, especially if you start early.
After all, many Americans save for retirement without maxing out their 401(k) contributions to the federally mandated limit. (In 2024, this limit was $23,000, excluding catchup provisions for those 50 or older.) According to a report from 401(k) provider Vanguard, only 14% of plan holders maxed out their contributions to the limit of $22,500 in 2023. But remember: As your retirement savings are invested in the market, there is no guarantee for their growth over time, as historical performance doesn’t ensure future results.
The principles of consistency and compounding don’t only apply to employer-sponsored retirement plans. Almost anyone who has earned money can open a tax-advantaged individual retirement account, or IRA. (In 2024, the contribution limit to a traditional IRA was $7,000 excluding catchup provisions.)
You can hold and contribute to this type of account alongside any employer-sponsored plan. IRAs can also be useful if you want to consolidate 401(k) from previous jobs into one account, but we’ll get into that in more detail later in this series. (SoFi offers you a 1% match for any rollovers and contributions to a SoFi IRA.)
One way to stick with your saving plans is to automate. Whether you’re automating your monthly contributions or your investments themselves, lifting the burden of having to remember – and worse, actually follow through – off you can be helpful. (SoFi makes it easy to set up recurring deposits with the amount and frequency of your choosing, and offers SoFi Plus members a 1% match on recurring deposits.) There are many ways to do this, and we previously wrote in depth about dollar-cost averaging, an investment strategy that prioritizes investing consistently over time.
Next up in this article series, we will tackle how to optimize your retirement accounts for your goals and why there is no one-size-fits-all solution.
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The S&P 500 Index is a market-capitalization-weighted index of 500 leading publicly traded companies in the U.S. It is not an investment product, but a measure of U.S. equity performance. Historical performance of the S&P 500 Index does not guarantee similar results in the future. The historical return of the S&P 500 Index shown does not include the reinvestment of dividends or account for investment fees, expenses, or taxes, which would reduce actual returns.
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