Recent college graduates starting their first jobs this year are feeling good about the opportunity to forge ahead in their new careers. Maybe they are also eager to buy a new car or home, and start paying down credit card or student debt.
But there’s an important opportunity awaiting them if they are willing to start “paying themselves first” by giving some consideration far into the future and planning now for their retirement.
Retirement may seem like an awful long time from now, but young workers who start saving for retirement right away can turn that time into a powerful ally. By regularly putting away even a small budgeted amount now, their money will have years to grow, giving them a better chance to make the most of life after retirement.
If you are starting your first job, heed this advice: take advantage of your employer’s retirement savings plan. If your employer offers a 401(k) or similar retirement savings plan, get signed up! You will to decide how much to contribute from each paycheck, but think about this: if your employer matches your contributions, that’s “free money” and you want all the free money you can get, right? For example, if your employer matches 50 cents for each dollar you contribute, that’s an immediate 50% return. Find out how much your employer match is, and how much you need to contribute to get all of it.
You can also open an Individual Retirement Account (IRA). Whether or not your employer has a retirement savings plan, you can start saving in an IRA, which is a personal account you set up with an institution like a bank or mutual fund company. Have a certain amount deducted regularly from your paycheck, checking or savings account and put into your IRA (up to $5,000 per year for those under 50).
There are two different types of IRAs, Traditional and Roth IRAs. Each offers different tax advantages, so do some research before choosing which type you wish to set up. The important thing, however, is to set one up!
Whether you start saving money in a 401(k) or an IRA, you will likely have another choice to make: how will your money be invested? Frequently your investment choices will be among different mutual funds. You might come across these two types of mutual funds: index funds and life cycle funds.
An index fund is a mutual fund that mirrors the performance of some particular segment of the stock or bond market. For instance, Standard & Poor’s (S&P) 500 Index fund tracks the stock prices of 500 large companies. You should pay relatively lower fees with an index fund, as the manager plays a limited role.
A life cycle fund adjusts the balance of your investments (usually stocks and bonds) to fit your age and the number of years until retirement. If, for example, you plan to retire somewhere around the year 2045 you might choose a 2045 fund.
A final piece of advice: leave your retirement money in its account to grow! Don’t cash out these accounts and spend the money or you’ll face stiff penalties, not to mention you’ll have wasted the fantastic opportunity that your friend “time” has given you.
This information is provided for general information purposes only and should not be construed as investment, tax, or legal advice. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.