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One of keys of achieving a comfortable retirement is starting your retirement saving as early as possible. As a new graduate, you may make more money in the next year than you have in your entire life thus far. When you think about it, it can be quite exhilarating. But…., before you make grand plans for your increased income, even if they are practical things you may want or need like a new car or saving for a down payment for a house, think about your future and retirement plans for a few minutes.
How long do you want to work?
Do you want to retire early?
How much will I need for retirement?
Do you plan on getting married and maybe having children?
Whatever the answers may be to the above questions may be, NOW is the best time to start saving for your retirement goal. The power on time and compound interest are on your side, so the longer you wait the more difficult it will be to achieve your retirement goals.
How do I Start Saving for Retirement Now?
Fortunately for you and the rest of us, there are two great options available that stand out above any normal saving or investing you could use to save for retirement, the 401k and the Roth IRA, and they each have advantages.
Investing in an employer sponsored 401k plan:
A 401k is a tax-deferred retirement plan in which you make tax free contributions now, and pay tax on your withdrawals during retirement. Most employers offer a 401k plan, and the majority, but not all, offer some kind of match. This match is free money. Some will offer a 100% match up to a certain percentage, while some will offer a 50% match for each dollar you put in, up to a certain percentage. The contributions you make to your 401k plan will come out of your paycheck tax-free, meaning you do not pay tax on this now. By not paying tax on your contributions, the actual decrease in your paycheck is less than the amount you are putting into your 401k. For example, if you are in the 15% tax bracket, to put $100 per paycheck into your 401k will only decrease your take home pay by $85.00. This should allow you to put a little more than you might otherwise be able to, and you should. At a minimum, you should enroll in your employer sponsored 401k and invest the amount required to get the full match from your employer. Most employers will let you participate from the beginning, although some make you wait a certain period of time. As soon as you are eligible, start contributing to your 401k at your new job.
Opening and investing in a Roth IRA-
A Roth IRA is a self-directed retirement fund you set up and contribute to yourself. A Roth IRA is funded with after tax contributions, but your withdrawals during retirement, both principle (your contributions) and interest, will be tax-free. If your employer does not offer a 401k or does not offer any kind of employer match, a Roth IRA is a great place to begin your retirement savings. You should also consider opening a Roth IRA for any amount you are able to contribute from your salary above the amount required to get the employer match for your 401k plan. Because you will likely be in a lower tax bracket now than later on in your career, investing in a Roth with after tax income will not have as big an effect now on your take home pay as it may in the future.
Why both?
Investing in both a 401k and a Roth IRA allows you to diversify the tax treatment of your future retirement income. Money from your 401k will be taxable when you withdraw it, while money withdrawn from a Roth IRA will be tax free. By focusing on your retirement and starting now, you can set the foundation for the retirement you want in the future.
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- The Roth IRA: A Closer Look at a Powerful Wealth Building Tool
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I think that retirement seems a very long way off when you are a student. I didn’t bother about pensions in my first few jobs as I felt that it was too long off. Now, I am not earning enough to be able to contribute and wish that I had invested more when I was younger, not necessarily in a pension but in a long term investment plan that I could use when I retired.
@Rachel:
Yes, I neglected to take advantage of several opportunities myself in my younger years, including buying company stock before it went public in a large package shipping company-the brown one;). I sure wish I had done that now!