Start now and budget for later by considering an IRA or 401(k)
Are you in a full-time position or looking to enter the working world? If graduating, you're probably starting a new job or resuming your existing career. Whatever your job situation, if your employer offers a 401(k) or other retirement savings plan, take full advantage of it. If your job doesn't offer a retirement savings program, it is a good idea to explore opening an IRA.
Retirement isn't what it used to be. On one crucial level, it's undeniably better—people are living far longer and enjoying healthier and more active retirement years. However, the harsh reality is that over the past 25 years, the burden and risk of financing retirement has quietly but relentlessly shifted from employers to workers with little organized pushback.
For a host of reasons, the goal of a financially secure retirement is becoming increasingly difficult to achieve. So you must start younger and act on the realization that even contributing an automatic $10, $20, or $50 per pay period can make an enormous difference in your future!
Let early contributions work their compounding magic for you. Over decades, your money has the potential to earn interest, and so does your reinvested interest. Try to increase your contribution level by 1% or more each year as your salary grows and you will reap the benefits in the long run. There are a million reasons to put off doing it, but the longer you wait, the harder it will be to accumulate the amount you need. After a month or two, you do adjust.
Company matches
Looking for an investment that earns a guaranteed return of up to 100%? Then hope your employer offers a company match on your 401(k) or other retirement savings plan. By not participating in a matching program, an employee leaves real money on the table—essentially passing up a raise. Company match formulas vary from firm to firm and can range from 1%–6% or more of a worker's pay. Mercer Human Resource Consulting reports that employer matches are becoming more generous, and a Hewitt Associates survey indicates that 8% of companies plan to add or increase a company match in 2007.
Heard of the new Roth 401(k)?
This year marks the 25th anniversary of the 401(k) which uses pre-tax dollars to reduce your taxable income, so you pay taxes on your salary minus your 401(k) contribution. No taxes are paid on your 401(k) until you start to withdraw money after age 59.
The new Roth 401(k) basically flips that formula, so that contributions are made with after-tax dollars. Upon turning 59-1/2, all your Roth 401(k) withdrawals—including the earnings on your investments—are tax-free. This is a very attractive option for both workers in their 20s, who are often in lower tax brackets, and the very affluent. Hewitt Associates reports that 14% of workers in their 20s selected the Roth 401(k) whenever it was available—the highest rate of participation for all age groups. Roughly 22% of companies currently offer the Roth 401(k), but that number is expected to jump now that the Pension Protection Act of 2006 makes Roth 401(k) plans permanent.
So how will you finance your retirement?
To a large extent, how you build that nest egg is up to you, but starting early—despite all the challenges—makes the task exponentially easier. Begin with your benefits department at your place of employment, or visit your local bank to see the savings options offered. Consider making an appointment with a Certified Financial Planner to ensure you are making the right decision for you!
Additional information
Sign up for student loan information, money management tips, and more. Visit Nellie Mae's Money Management Center designed exclusively for graduate students.
Here are some resources for information on how to make the most of your future savings.
www.401khelpcenter.com/Employee_index.html
www.sec.gov/investor/pubs/inws.htm
www.nelliemae.com/calculators
www.investopedia.com
www.bankrate.com/brm/calculators/manage-money.asp
www.smartmoney.com
The FinMan Grad Program is provided by Nellie Mae. Learn more at www.nelliemae.com/FinManGrad.