EP Wealth Senior Vice President, Advisor, Dallin Cutler, CFP^®, discusses the benefits of saving early for retirement. Learn how compound interest, time in the market, and choosing the right account types can influence your retirement planning. 

The Benefits of Saving Early for Retirement

No matter your age, it's never too early to start saving for retirement. I say this knowing full well that worrying about how things will look for you financially when you stop working may not seem like a top priority at this point. After all, retirement could be decades away for you, and you may have student loans or other debts to pay off. However, though it's not always easy, being disciplined about saving now will allow you to reap the financial rewards down the line.

Below are several reasons why saving early for retirement can play a role in long-term financial planning.

Five Things to Consider About Saving Early 

1. Compound growth — Your money grows on top of itself over time
2. Longer time horizon — More time to navigate market fluctuations
3. Lower monthly contributions needed — Smaller amounts can go further when you start sooner
4. Less pressure later — Reduces the need to catch up during peak earning years
5. Easier to maintain your lifestyle — A longer runway may help you enter retirement on your own terms

Compound Interest

The earlier you start saving, the more time your money has to potentially grow through compound interest. One example of this is billionaire investor Warren Buffett, the "Oracle of Omaha." As CEO of Berkshire Hathaway, Buffett has long encouraged individuals to start saving and investing early due to the effects of compound interest.

To give another example, in Morgan Housel's book "The Psychology of Money," Housel writes that a significant portion of Buffett’s net worth came after his 65th birthday. This example is often cited to illustrate the role time can play in long-term investing.

A Longer Time Horizon

The longer your savings have to grow, the more time you can have to navigate market fluctuations and potentially recoup any losses. Jim Simons, founder of Renaissance Technologies, was known for emphasizing disciplined, systematic investing and avoiding emotional reactions to short-term market movements. His philosophy reflected the importance of maintaining a long-term perspective and staying focused on a consistent investment approach over time.

Lower Lifetime Savings Need

The earlier you start saving, the more time you have to work toward your goals.

Choosing the Right Retirement Savings Vehicle

Once you've decided to start saving, choosing where to put your money is the next step. Several account types may be worth considering, each with different features depending on your situation.

Retirement accounts such as a 401(k) or Roth IRA

These are among the most common vehicles for long-term retirement savings. A 401(k) typically allows you to contribute pre-tax dollars, which lowers your taxable income in the year you contribute. If your employer offers a match, that's essentially additional compensation that goes toward your retirement.

A Roth IRA, on the other hand, is funded with after-tax dollars, but qualified withdrawals in retirement are generally tax-free. For younger savers with a long time horizon, the Roth option can be particularly appealing because it allows decades of tax-free growth.

Brokerage accounts

Unlike retirement accounts, brokerage accounts don't come with contribution limits or early withdrawal penalties. That added liquidity can make them a useful complement to tax-advantaged accounts, especially if you've already contributed up to the limits on your 401(k) or IRA.

While brokerage accounts don't offer the same tax advantages, they provide flexibility to access funds if your plans or needs change before retirement age.

Health Savings Accounts (HSAs)

HSAs are often overlooked as a retirement savings tool, but they can offer a combination of tax advantages. Contributions are generally tax-deductible, growth is tax-free, and withdrawals for qualified medical expenses are also tax-free. If you're in a position to cover current medical costs out of pocket, you can invest your HSA balance and let it potentially grow over time.

Given that healthcare costs tend to be a significant expense in retirement, an HSA that has been building for years can be a valuable resource.

Saving vs. Paying Off Debts

A common question that many clients ask when it comes to managing their money is whether they should concentrate on paying off their debts first or investing right away. There is no universal answer to this question. The right choice ultimately boils down to a couple of key issues. The first is more subjective and changes from individual to individual: how do you feel about your debt, and how badly do you want to get it paid off?

The second and more practical issue is the rate of interest that you are paying on that debt. If the debt you carry is charging you more than six or seven percent per year, then you're probably better off paying off your debt than investing.

The Risks of Waiting to Save for Retirement

The benefits of saving early become even clearer when you consider the difficulties that can come with a late start.

Maintaining your lifestyle may become more difficult.

If you haven't built a sufficient savings base by the time you retire, the gap between what you've saved and what you need to live comfortably can be significant. Some people find themselves needing to cut back on spending, downsize, or delay retirement altogether. The lifestyle you've built during your working years may be harder to sustain without a savings strategy that has had time to grow.

You'll likely need to save a much larger portion of your income later.

The math works against you when you start late. Someone who begins saving in their 20s can contribute smaller amounts over a longer period and still potentially accumulate meaningful wealth through compound growth. Someone who starts in their 40s or 50s may need to set aside a significantly larger share of their income each year to reach a similar goal. Even then, there's less time for that money to grow.

The pressure to catch up can also lead to riskier investment decisions or added financial stress at a time when many people are also managing competing priorities like college tuition, taking care of aging parents, or peak career responsibilities.

A Financial Advisor Can Help You Get Started

Starting early gives your savings more time to work for you, and may give you more flexibility when retirement arrives. To discuss your retirement planning options, contact a financial advisor at EP Wealth Advisors. Or click here for more financial education resources.

DISCLOSURES

• Request an appointment with an EP Wealth Advisor when you have a minimum of $500,000 in investable assets – which includes qualified retirement plans (IRA, Roth IRA, 401(k), taxable brokerage, cash (savings / checking) and CDs. Investable assets do not include your home, vehicles, or collectibles.
• There is no guarantee nor is the intention of this publication to establish any sense of assurance, that, if followed, the strategies referenced here will produce a positive or desired outcome. In fact, there is no guarantee that any of the steps detailed will enable the ability to generate successful or appropriate strategy or approach. The intent of this article is strictly for educational purposes.
• The need for a financial advisor or financial planner and/or the type of services required are specific to the uniqueness of each individual’s circumstances. The referenced material identified herein is limited in nature and specific to what is offered by EPWA. There is no guarantee or warrantee that the services offered by EPWA will satisfy your financial services requirements. Services offered by other advisors may be more suitable to your specific needs.
• This content is provided for educational purposes only and is not intended as personalized investment, tax, or legal advice. Individual results will vary based on specific circumstances.
• All investment strategies, including retirement accounts and plans, have the potential for profit or loss. Different types of investments and investment strategies involve varying degrees of risk, and there can be no assurance that any specific investment or strategy will be suitable or profitable for a client's portfolio. The risk of loss can never be eliminated even if working with a professional.
• EP Wealth Advisors, LLC. is registered as an investment advisor with the SEC and only transacts business in states where it is properly registered or is excluded or exempted from registration requirements. SEC registration does not constitute an endorsement of the firm by the Commission, nor does it indicate that the advisor has attained a particular level of skill or ability.
  
• EP Wealth Advisors, LLC (“EP Wealth”) makes no representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information presented in this report. EP Wealth has used its best efforts to verify the data included in this report. The information presented was obtained from sources deemed to be reliable. However, EP Wealth cannot guarantee the accuracy or completeness of the information offered. All expressions of opinion are subject to change without notice.
• How to save for retirement, the options available, and/or when/how to open a retirement account is unique for each individual. A number of factors have to be considered and for this reason it can be a difficult process to find the options that are most beneficial for you. No guarantee or warrantee is made that any of the information submitted or referenced here will be suitable, profitable, or prove successful. Other retirement saving options exist that may be better suited to your individual needs. Please consult a professional, including, a financial, tax, legal and/or human resources professional before implementing anything referenced herein.