Legend has it that Albert Einstein once called compounding interest the most powerful force in the universe. Unfortunately, that concept has escaped many of those who would benefit most from it: the 20-somethings who have entered the work force but aren't saving up for retirement.
While it can be hard to justify saving for something that will occur decades into the future, financial advisors say its importance can't be understated.
One reason is that Social Security is far from guaranteed: Without reform, the program will not be able to pay out benefits at current levels, starting in 2041. People who are 22 years old now would typically still have at least 10 years to go until retirement at that point.
Another reason is that compounding interest makes saving early far more profitable than starting late.
As an example, Vincent Barbera, director of financial planning at TGS Financial Advisors, offers two different scenarios: Person X deposits $2,000 into an IRA each year from the ages of 22 to 31, then stops, while Person Y deposits $2,000 each year from the ages of 31 to 65. Both have the same interest rate and allow interest to accrue. Person X will earn nearly $50,000 more than Person Y by age 65, even though the latter contributed $50,000 more to the account over 25 additional years.
With that in mind, here are five helpful tips for 20-somethings who want to start preparing for the future:
Put "surprise" cash into an IRA. Instead of spending that $100 birthday present or $600 rebate check, pretend you never received the money and stick it into your retirement savings account.
Joseph Birkofer, a financial planner at Legacy Asset Management in Houston, suggests putting at least 7% of your gross pay into such an account to match your contribution to Social Security and Medicare.
Use automatic deposits from your check or bank into your IRA. That way, you don't have to put in the effort of manually depositing funds and won't be tempted to use them toward another purchase.