Should you wait a year before starting to save for retirement? | Smart Change: Personal Finances

The answer depends on a few factors, including your overall financial health. Below, we’ll talk about everything to consider so you can decide on your best shot.

Retirement is really important to a lot of people, but your day-to-day financial security should come first. You need to make sure you have enough money aside to cover your essential bills. This includes predictable monthly expenses, as well as bills that come in once or twice a year.

Next, you need to build an emergency fund if you don’t already have one. At a minimum, you should set aside at least three months of living expenses, and six or 12 months is even better. It’s up to you to decide what you feel comfortable with.

If you already have an emergency fund, review it now. With inflation driving up expenses, your current emergency fund may no longer be enough. Consider beefing it up a bit to account for the rising costs.

Be sure to do these things before setting aside money for retirement. Failure to do so could land you in serious trouble in the event of an unexpected bill. You may have to divert money from your retirement savings and you could end up with long-term debt problems if you have no other way to cover these unexpected costs.

Once you’ve paid your bills and your emergency fund, you can focus on saving for retirement. You might be reluctant to invest right now for fear of an impending recession, but don’t let that stop you. There is always a risk in investing, even when times are good. And over the long term, most people see their wallets doing pretty well.

Plus, postponing retirement can actually make your job harder when you start. Suppose you are 25 years old and want to save $1 million by age 65. You could do this by saving $403 per month if you earned an average annual rate of return of 7%. But delaying retirement savings for just one year means you should now be setting aside an extra $30 a month. It may not seem like much, but over the course of your career you will need to save over $14,000 more than if you started saving at age 25.

If you’re worried about losing money in the short term, the best thing to do is to use a strategy called cost averaging. This is where you set aside a certain amount on a schedule, such as a percentage of your salary each pay period. Sometimes you will buy when the stock price is high; other times you will buy when prices are low. In the end, you will pay an average amount.

Cost average can also help you avoid emotional decision-making, which is useful all the time, but especially during a recession. You can often automate your contributions, and once you do, there’s usually no need to check your portfolio every day. Either way, the daily ups and downs shouldn’t matter much to you if you have decades to go before retirement.

Focus on regular contributions over time. Consistency is essential to build a nest egg that will accompany you throughout your life.

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