You've graduated: Now start saving for retirement

Welcome to WalletPop's series "You've graduated. Now what?" Our bloggers have a wealth of suggestions to help you find you way through that time of amazing transformation, from student to working stiff.

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Last summer my niece Cindy graduated from college and came to visit. I told her we needed to have A TALK. She may have been bracing for some trite wisdom or an age-inappropriate tirade on birth control. Instead I hit her with something much worse. I told her the grim news: she should already be thinking about saving for retirement.

Since Cindy is a far smarter kid than I ever was, it didn't take much to convince her of the "miracle of compounding" and how much easier it is to save for retirement when you start young.

Here's an example I found just plugging numbers into an online calculator: A 21-year-old making $25,000 a year and putting away 3% of her income would end up (after adjusting for raises and a 8% stock market return) with $3.1 million at age 65--enough to live on 90% of her last salary. If she started a decade later, she'd have less than half that at $1.4.

It's staggering how much better you'll do in retirement if you start when you're young. It's also amazing that we barely teach our young graduates anything about retirement savings even though the weight of the expense falls is falling increasingly on individuals to manage. Will there be any traditional pensions around when the class of 2008 retires? Or even Social Security?

For kids graduating today, unfortunately, it's not enough just to understand the concepts of compounding. Even the most diligent graduates will be hard-pressed to open an IRA with the colossal weight of student loans. The average kid graduates with $21,000 in student loan debt. Two-thirds graduate with some debt. Yet this same generation is under pressure to start saving for retirement as soon as possible because their retirement safety is completely frayed.

If they are able to put money away, they need to know where to stash it. I didn't start saving for retirement till my late 20s and then it was in some ridiculous load fund from Smith Barney. There's a whole other talk to have on the miracle of low fees on investment returns, but save everyone the trouble I just steer them to Vanguard. Vanguard investors pay no sales charge and they have a razor thin expense ratio, both of which can be huge to retirement investors.

To make everything simple, Vanguard already has a Target Retirement 2050 Fund for those aged 18-25. Like all lifecycle funds, the manager gradually moves the money from stocks to bonds as retirement nears. That way all investors do is put money in and walk away. If it sounds crazy to think about investing for retirement so young, consider this: Already the 2050 fund, which started in 2006, has $356 million in assets.
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