Even in the current economic environment, many people do not realize the importance of planning for retirement. Yet, saving for retirement is always important, at any age. Especially for recent college graduates who need to establish their presence in the massive global market and get the most out of it.
The following are effective retirement saving tips for college students.
a) Explore private saving options
The most important thing to realize as a college graduate is that time is on your side. The earlier you start saving for retirement, the better the financial foundation you set for the retirement years. If you start saving as a college graduate, the money will compound over the next 40 years, while if you start saving in your 40s, your money will have twenty years less to compound. By start saving early, you will have money for a down payment on a mortgage and you will be able to set up an emergency fund to anticipate potential financial difficulties.
Exploring private saving options for retirement is entirely within your control. You choose the amount of money you can save each month, although the majority of financial advisors consent that saving 10% of your annual income is enough to set up an emergency fund for retirement.
b) Explore private investing options
Time is equally important in investing. Talk to a financial advisor and find out your risk tolerance – how much risk are you willing to undertake for a given level of returns. Discuss possible investment options that match your investor profile and can give you piece of mind.
If you are a conservative investor, create a well-diversified portfolio with a mix of stock funds, bonds and cash with a focus on bonds and cash because they are less risky than equities. If your portfolio incurs losses while you are still young, you have a lot of time to recover from losses before retirement. You even have time to incur more losses until you establish the best asset allocation for your investor profile.
It is important to get all this information as a college graduate: 1) you can understand it, especially if you have taken a finance course in college, and 2) you have time to invest your money today and increase your capital over the next years without being deprived of your daily activities. Investing early allows the compounding more time to build.
c) Start a Roth IRA
Consider a Roth IRA for your retirement so that you don’t pay taxes on your investment earnings until you withdraw your funds. On the condition that you meet certain criteria, the amount withdrawn upon retirement is not taxed because you have paid the taxes in the beginning and you principal has grown tax-free. For instance, if you start a Roth IRA as a college graduate and you contribute $2,000 yearly at an average annual return of 8%, your Roth IRA Fund Balance at 65 will be 518,113.04 and you won’t have to pay a penny to the government.
Keep in mind that your company may offer you a choice between a Roth IRA and a traditional IRA. The best option for you the Roth IRA, not only because it allows aggressive investing that can be allocated over a longer investment horizon, but mostly because as a young person you are in a low tax bracket, but you will eventually retire in a higher tax bracket in your 65s. However, as IRAs are specifically designed for investment, there are penalties for early withdrawal.
d) Set up a budget
Setting up a budget gives you financial direction and helps you save as much as possible. Besides helping you saving money and reducing unnecessary spending, a budget can help you avoid a financial crisis and plan for major financial changes, including buying a new home or planning a wedding. If you learn to keep track of your spending as a college graduate, you will be able to control your spending habits and save money for the retirement years.
e) Live with your parents
If you are a recent college graduate who lives with the parents, don’t get discouraged. Many college graduates continue living with their parents for a year or two after graduation until they get a good job that can pay their bills and give them financial independence. The bottom line is that living with parents lowers your living expenses and allows you to save A LOT of money.
Financial security for retirement is extremely important. The earlier you start, the safer you will feel during retirement years when you won’t be able to work anymore. As average life expectancy continues to extend, the need to plan for retirement becomes increasingly critical. You need to take advantage of those 45 years available until retirement while being able to cover your living expenses. So, make sure to start saving for retirement as a college graduate for safer retirement years.
Sources:
http://www.investopedia.com/university/budgeting/basics2.asp
http://articles.moneycentral.msn.com/learn-how-to-invest/how-to-set-up-your-first-401k.aspx
http://www.moneychimp.com/articles/rothira/rothintro.htm