5 Things Every College Student Should Know About Retirement
by Danielle Meltz, Student Blogger
As stressful as Gen Chem is right now, your retirement is going to be a whole lot worse if you don’t start thinking about it now. The dream of retiring on a beach, sipping Mimosas and smoking cigars doesn’t come easy. However, the quicker you do it, the less money you’ll have to put into it.
Here’s an example from CNN Money to show you the difference saving at age 25 and saving at age 35 makes:
If you start a retirement plan at the age of 25, and put aside $3,000 a year for 10 years, and then you stop. By the time you reach 65, your $30,000 will have grown to $427,000. (Assuming it is a tax-deferred retirement account at an 8% annual return.)
If you start a retirement plan at the age of 35, and put aside $3,000 a year for 30 years, and then you stop. By the time you reach 65, your $90,000 will have grown to $367,000.
Saving at the age of 25 provides you with a lot more money, while putting 1/3rd
of the money in.
Retirement may seem like a lifetime away, but it’s a good idea to start as soon as you can. Here are 5 things ever college student should know about retirement:
1) Should a retirement plan be your first savings account?
While retirement is going to be a big priority in your life, in most cases you cannot withdraw the money that you put in. This means if you currently have student loans, saving money to put towards rent and emergency situations is more valuable than having a healthy retirement fund. While starting in your 20’s or during your first job, is the ideal time to prepare for retirement, you should save from 3-6 months of expenses as an emergency fund before you start investing.
2) How do I get started?
Let’s break down the two main options. IRA vs 401k
IRA (Individual Retirement Account): This is an individual plan which can be either a Traditional IRA or a Roth IRA. IRAs are the biggest option with most college students who are not working full-time jobs. A Traditional IRA gets taxed when you put money in, and a Roth IRA gets taxed when you take money out before you are 59 ½.
The question here is whether or not you think you will need the money, for education, or housing, before you are 59 ½. If the answer is yes, then a traditional IRA is right for you. However, if this money is solely for retirement, the Roth IRA might bring more savings.
401K: This is an employer-based plan through full-time and some part-time jobs depending on the employer. The reason employer based plans are often the first and best option is because they are easy, it comes out of your paycheck automatically before taxes. There might be a company match available, which means that they will match up to a certain limit, say 4% for example. This money builds up in your account, without you having to sacrifice more to hit your retirement goal.
3) Where do I start a plan?
If you have an employer who might be able to match contributions, they are the best place to start at. If you do not though, the real question is which bank to start a plan?
The University of Colorado’s Elevations Credit Union
might be a good place to start for new savers. They are used to college students seeking advice, and you can make appointments through their advisory website
. You can set up a retirement fund anywhere even if you plan to move out of Colorado when you graduate. It might be beneficial however, to talk to an advisor about the best place to start a fund.
4) The biggest mistake college students make
Not making a long-term commitment. This can mean not putting enough money into your retirement account, or buying an investment and then quickly selling it due to an unanticipated need, which might lead to losses on your money. Emergency accounts are vital for this reason. You need to be able to commit in the long-term, while have emergency savings you can tap into incase something comes up.
5) Is social security still a thing?
Social Security currently plays a role in retirement; however the amount available has decreased and will continue to do so for over the years to come. Although the program will still be running in the future, the best decision is to rely on your own individual savings for retirement.
Overall, the biggest way to help you prepare for retirement is creating a habit of saving. By putting money into your retirement account first, instead of at the end of the month. This teaches you how to adjust the money you spend each month. This may sound easy, but it takes years of learning how to budget and financially plan before most people are comfortable with putting their savings before their immediate needs.
October 7th, 2014