As the economy continues to recover slowly from the recession, many employees are slowly regaining their confidence in saving for retirement. The Great Recession took its toll on many retirement accounts, causing millions of dollars in losses and forcing some to use their savings for ordinary daily expenses. Recent college graduates should not feel discouraged as they enter the work force. Saving for retirement remains an important factor of life regardless of your age. College graduates must take advantage of their time now to build a retirement fund as they have their entire working life ahead of them. The sooner they get started, the more they will be able to set aside for the far away future.
Employer Retirement Plans
When considering to start a retirement fund, there is no better place for a recent college graduate to start than with their employer. Most companies offer some sort of retirement package to their employees, the most common being the 401(k). Contributions to a 401(k), or 403(b) for most non-profit organizations, are made from your gross income, prior to taxes. This reduces the amount of taxes you pay on your income. Also, some employers will match your contribution up to a certain percentage of your annual salary. This is almost like getting free money in addition to your income. Recent college graduates should contribute enough to maximize the contribution from their employer.
Investment Retirement Accounts (IRA)
Another option for recent college graduates to consider is investing in an investment retirement account (IRA). Two such accounts are the Traditional IRA and the Roth IRA. Contributions to the Traditional IRA are tax-deductible and while the funds remain in the account, any capital gains or interest earned are not subject to tax. However, when the funds are withdrawn from the account, they become taxable. In contrast, Roth IRA contributions are not tax-deductible. Withdrawals made from a Roth IRA account can be made without any tax liability. College graduates should look closely at each option to determine which makes more sense given their personal financial situation.
Recent college graduates have youth on their sides. On average, they will work for the next 40 years. That’s 40 years of savings. Even better, that’s 40 years of compounding interest, the major component that allow money to grow over time. To truly take advantage of this effect, recent college graduates should take an aggressive approach with their investments. Stocks have shown that they tend to grow 10 percent on an annual basis. This growth is historically more than any other financial instrument. Build a portfolio that focuses mostly on equity investments during your early years of employment to realize the largest gains. As you grow older, you can adjust your portfolio make-up accordingly.
Planning for retirement at any age should involve considerable thought about when you want to retire and how much you think you will need to live comfortably in retirement. By starting to plan soon after graduating college, you give yourself the most time to consider your given options and plan accordingly. Recent college graduates can also build plans that they can alter whenever their financial situations change. Don’t take for granted the fact that you’re young when thinking about retirement. Time moves faster than you think. Start today to begin building yourself a better tomorrow.