By Edward “Ed” V. O’Neal, Vice President and Manager, Retirement PlansPrint This Post
Congratulations college graduates, all your late-night study sessions and frantic essay writing is finally over! Now, welcome to the “real world” as your attention begins to turn to matters of joining the workforce and actual adult financial matters. Saving for retirement is probably near the bottom of your financial priorities, after paying rent, student loan payments, and determining how much of your income is left for takeout food and Uber rides. But starting the process of saving for retirement early in your work life is a major part of “adulting” and can have significant financial rewards.
Starting early with saving for retirement – even just a little – can give your money a much better chance of being able to grow over time. And while it might be agonizing for young college graduates to need to be planning for a secure retirement future, creating good saving habits and learning to forego the tantalizing thought of immediate reward and instead investing in your future will prove to be well worth the sacrifice. Ultimately, while social security is a nice cushion for the years after employees leave the workforce, it likely will not be enough by the time this graduating class reaches retirement age.
Here are a few tips to help you avoid the temptation of procrastination and make saving for retirement as easy as possible:
- Start right away – Adjusting to a new job can be daunting, but don’t let that be an excuse to ignore or defer your participation in your employer retirement plan. Be sure to sign-up for your employer sponsored retirement plan, if you have access to a 401(k) or SIMPLE IRA plan, at the same time you’re completing other key benefits forms (i.e. health plan, insurance, etc.). That way you can get used to having retirement contributions deducted from your paycheck early before you can even miss the money. Also, if you have access to a 401(k) or SIMPLE IRA plan, remember to take advantage of any available employer matching provision. An employer match is equivalent to the employer providing free money if you agree to contribute a certain amount toward your retirement account.
- You can start small – You might not be making the big bucks yet, but waiting until you earn more money to start saving for retirement can cost you. Saving even a little now can pay off later since the money will grow over time. Saving for retirement is about maximizing compound interest, which builds onto itself. Over decades, your original contributions will grow due to compound interest. Conversely, waiting to start your retirement savings will require a greater savings rate to make-up the difference from the missed time of compound interest.
- Consider an IRA – If you are working with an employer that doesn’t have a retirement program, or you’re self-employed, consider saving for retirement through an IRA. There are two primary types to consider – Traditional IRA and Roth IRA. Through a Traditional IRA, you may receive a tax deduction that can lower your overall tax bill. You’ll owe taxes later when you distribute assets from the account. With a Roth IRA, you don’t get a tax break up front, but the account can provide tax-free income in retirement, if certain conditions are met.
- Increase your contributions over time – Many financial experts recommend that you save between 10% – 15% of your income for retirement. However, if you’re not quite there yet, you can work toward that goal by increasing your contribution rate over time. For example, consider bumping your savings rate by 1% or 2% every time you get a pay raise.
Entering the “real world” as a graduate can be both overwhelming and exciting, but you can set yourself up for financial success with a little discipline. Remember, there will always be competing priorities and it may sound tempting to ignore saving for retirement right now, but there will be much less worrying in the long run if you develop a consistent savings strategy early on.
 A 10% early withdrawal penalty may also apply on the taxable amount of your distributions from a traditional IRA or Roth IRA before age 59 ½.