Recent graduates have a lot on their minds: moving, finding a job and the looming repayment of school loans. Retirement is typically low on the list of priorities, but ignoring the issue entirely can literally cost young professionals hundreds of thousands of dollars.
It’s difficult to think about retirement when you’re just starting your career and trying to make ends meet. It sounds counterintuitive but retirement planning should really be the first thing on a recent graduate’s mind.
The examples below demonstrate of how retirement planning can unfold when funds have the longest time possible to grow:
$100 a month for 20 years starting at age 21 = $468,236
A new grad invests $100 per month beginning at age 21, and continues that monthly investment for the next 20 years, stopping at age 41. Their total investment is $24,000. Assuming an 8 percent annual return, compounded monthly, that $24,000 will become $468,236 by the time the grad retires at age 67.
$100 a month for 20 years starting at age 41 = $95,039
Wait until age 41 to begin investing $100 per month for the next 20 years, stopping at age 61. Their total investment is, again, $24,000. However, assuming the same 8 percent annual return, compounded monthly, the nest egg will only total $95,039 by age 67.
In this scenario the total cost of delaying retirement is $373,197. WOW that’s a real difference!!!
These numbers are jarring, but losing out on thousands of dollars does not have to be your reality. No matter your age, starting to build your retirement now can help you maximize your options and retirement assets.
Below are some expert tips for new grads to get a head start on saving for retirement:
Save a portion of each paycheck. Even a minimal amount, when compounded over time, adds up. Use savings as your emergency fund or toward major purchases, such as a new car or a down payment on a house.
Track your monthly income and expenses and plan accordingly. Differentiate needs from wants and prioritize wants by happiness, rather than cost. Cut the items that don’t provide long-term happiness. That way, it won’t feel like as much of a sacrifice. Then, set short and long-term goals. This will show what you can realistically afford now and help you avoid racking up credit card debt that will affect your future ability to save and invest.
Use employer-sponsored retirement plans
If your employer offers a retirement plan, enroll as soon as you are eligible. An employer-sponsored retirement plan, like a 401(k), deducts money from your paycheck before taxes. Many employers match your contributions, so take advantage of this important benefit at the highest match possible. This is essentially “free” money, so if you don’t take it now, you’ll lose the match and the potential tax breaks.
Continue your education
Understanding important money topics and available resources can help you become financially savvy. Subscribe to an investing magazine or podcast, visit financial websites or follow a credible financial blog.
Get a reality check
Ignorance is not bliss when it comes to your personal finances. Determine your long-term goals and use free calculators (like the ones on our website) to help assess your situation and develop an action plan to pursue your financial potential.
Talk it out
Parents, trusted family and peers can provide great insight into financial matters based on their own successes and mistakes. Use their experience to your advantage to make smart money decisions. Of course, financial decisions today do not set in stone what will ultimately happen in the market. Rather than traced back to a good or bad decision about this stock or that industry, the final results of investing are always going to be unpredictable. If you are looking for an example of the past not predicting the future, investing is just such a place. Also, no matter your age, it’s never too soon to meet with a financial advisor to go over your goals and create a plan for retirement. Be sure to consider the tax aspects of your retirement options as well, discussing these with your tax advisor is an important part of a serious look at retirement planning.