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It’s never too soon to think about retirement. 

Retirement. It may not even be on your radar, especially if you’re several years out from retirement age. But starting to prepare for retirement now can make a huge difference 35 or 40 years down the road. 

Primary sources of retirement income

Today, most people rely on two primary types of retirement income.

  • Social Security

    This money you pay into a general government managed account from every paycheck you earn. When you retire, you get a portion of that money back for the remainder of your life in the form of monthly payments. Social Security takes into account your 35 highest earning years to calculate what your monthly income will be when you retire.

  • Qualified employer retirement plan

    The second form of income often comes from a qualified employer retirement plan, such as a 401(k) or 403(b). You contribute a portion of your earnings to managed investments that will hopefully increase in value over time. In addition, employers may match a percentage of your contribution, which is free money that may also help increase your account’s value.


Other sources

Though less common, pensions and Individual Retirement Accounts (IRAs) are additional sources of retirement income for some people. Only About 12% of private sector workforce employees have a pension plan, which is a defined retirement benefit where a company sets aside additional money that is paid out as monthly income for life, based on years of service to the company; after a period of time the employee becomes “vested” and 100% of that money is theirs. However, many companies have phased out pension plans opting for retirement plans such as a 401(k) or 403(b) instead.


And for people who are self-employed, or their employer doesn’t offer a qualified retirement plan, they can set aside money in an IRA, using pre-tax dollars or a Roth IRA, using after-tax dollars to invest in managed funds.


If you have a qualified retirement plan through your employer but reach your contribution limit, you may consider contributing extra money to an IRA.


Starting early

To maximize the benefit of any of these long-term retirement income sources, you need to start early, stay the course and continue to increase your contribution amounts over time.


It’s important to remember that you are in control when it comes to retirement preparation. It’s up to you to determine how much to contribute to your account, how much to add to your contribution amount year after year and how your contributions are invested.


Compounding is key

Hesitating can be costly

How does compounding work? When you invest your money, you have a potential to earn more money, not only on your investment but also on any earnings from those investments. Compounding is the growth of these primary earnings and the earnings themselves.


However, compounding needs time to work. By starting early on in your career, the sooner and faster your accounts have the potential to grow.


Putting off participating in a retirement plan comes with a cost. Waiting can mean the difference in tens or even hundreds of thousands of missed dollars in your retirement account 35 or 40 years from now. To determine how the cost of waiting can impact your retirement, try our cost of waiting calculator.


Once you learn these powerful concepts of starting early, compounding and the cost of waiting, it can change your retirement preparedness behavior.


Starting early makes a big difference. Watch our video to find out how.