Planning for retirement at your first job
Congratulations, 2015 college graduate. You got your diploma in June, and just a few months later, you're sitting pretty in your very own office cubicle, happily flinging paper airplanes at your colleagues and planning your next happy hour. Yee-haw! Who has time to think of retirement?
Besides, you're between a rock and a debt place. Student loan debt for grads in your class passed a stunning, record-high level – $35,000, according to an analysis of federal government data by Mark Kantrowitz, the publisher of Edvisors.com.
Big. Fat. Ouch. At $8 a pop for a daily pizza and beer run, that's 12 years of repayment – and that's not counting interest. And what happens when you stack credit card debt on top? And a car loan? And everyday expenses from rent and utilities to commuting costs?
But heavy debt or a goal that's decades off shouldn't be an excuse for delaying retirement planning. Small steps, if taken regularly over time, can build a fortune with little, if any, financial pain.
"You wouldn't want to miss out on potential contributions to your company retirement plan by putting all your dollars toward paying off your debt," says Vanessa Levan, vice president and financial advisor for Busey Investment Services in Champaign, Illinois.
If you know how to clip coupons for groceries, it's not that much harder to find retirement savings that balloon with time. Here are seven retirement investment strategies and key pointers for recent grads to keep in mind when getting new plans underway.
Score a big win by hitting match point. New graduates may feel fortunate enough to land a job with a decent salary, let alone bet on gratis dough. But it's often there for the taking, and you don't have to storm into the boss' office and throw a tantrum to get it. First, start a retirement account, usually a 401(k), or a 403(b) at public schools and charities. Now, match the funding to a level where your employer gives you a dollar or 50 cents for every dollar you invest. Usually this "match level" amounts to 6 percent of your paycheck – so what's the hardship in skipping a bar burger now and then? Just don't skip the opportunity to match, like so many of your fellow grads do. A 2014 Aon Hewitt analysis of more than 3.5 million employees shows that nearly 40 percent of 20- to 29-year-olds save at levels below the company match threshold.
Keep that job to keep free money. Now comes the tricky part, especially for would-be young job hoppers: If you land a great gig with a company match, the free funds usually come with a catch – you have to stay for a given number of years to keep all the dough. "You don't get to keep employer contributions to your 401(k) until you are vested in the plan," says Joan Kuhl, a millennial career expert and founder of Why Millennials Matter, a consulting company that offers advice to employers about attracting and keeping millennial workers. "If you have control over when you leave the company and are close to becoming vested, I highly recommend staying with the firm for a few more months. This could mean the difference of thousands of dollars to your nest egg." And of course, that money grows over time – $15,000 in matches that just sit in a 401(k) for 40 years, at a 5 percent return rate, will be worth close to $106,000 once you make the vesting period. And that brings us to ...
Take an interest in compound interest. Forget what that grumpy professor said about you: This will make you look like a genius. "Albert Einstein once called compound interest 'the most powerful force in the universe' and he was a pretty smart guy," says John McFarland, coordinator of the financial planning track at the Virginia Commonwealth University School of Business. Most people only experience this in reverse, where credit card debt explodes over time, even when they make minimum payments. But working in your favor, compound interest turns into your retirement account's best friend. For example: If you start with $2,000 at age 20 and add $150 a month with a 5 percent annual return, you'll have more than $305,000 by age 65. But the graduate who waits until age 30 will accrue about $173,600. He only missed $18,000 in contributions – but more than $131,000 in financial growth.
QLAC, the new annuity wrinkle. In basic terms, annuities are financial products, often sold by insurance agents, designed to accept and grow your funds, and then pay out a stream of money once they reach maturity point called annuitization. But new rule changes have made annuities a smart, simple choice for new hires. In July 2014 the IRS established the qualified longevity annuity contract, which sets new guidelines for investors to create their own pensions. When a financial manager or insurance broker sets up the proper annuity, you get guarantees that you will never outlive your money. That adds up to a big building block for retirement savings. "To secure a better retirement fund, an annuity is valuable asset for consideration in your retirement portfolio," says Ned Gandevani, coordinator of the master of science in finance program and a professor at the New England College of Business.
Work your employee stock purchase plan. If your job offers an employee stock purchase plan, you can buy company stock at a juicy discount, meaning that your shares automatically earn money the moment you buy them. If you amass enough shares over time, and the price remains stable, you can sell them for a gain and put the money into your 401(k) or an individual retirement account outside of work. Or, you can hold onto the shares for many years and create a nest egg to supplement other retirement savings. Keep in mind that you'll pay a long-term capital gains tax once you sell the shares, though. Also, financial experts recommend that employee stock shouldn't exceed 10 percent of your retirement portfolio.
Don't touch that nest egg. One of the most common mistakes new workers and recent grads make is to treat a retirement account like a rainy-day fund. In an absolute emergency, tapping this resource might save you – but otherwise, it's best to leave it alone. The IRS imposes stiff charges for early withdrawals from a 401(k): all the taxes due on the money plus a 10 percent penalty.
It's never too early. Like anything else on the job, retirement planning takes practice and persistence. But never assume you're too young to start: In fact, you're never too young to begin. "Investors who start early, practice patience and stick to a long-term investing strategy often see the best returns and financial success," says Colton Dillion, director of marketing strategy at the Acorns online investment site.
In other words: The more years you spend growing your retirement garden, the better your chances it will feed you in fine style later on.
Copyright 2015 U.S. News & World Report
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