I want to start saving for retirement right out of college, but the job market is grim. If I'm left with a no-benefits, part-time job before beginning a career with a salary and benefits, how can I set up my own retirement plan? And further, how can I keep those funds growing when I do eventually have a 401K, i.e. do I take the money out of my original and put it in the new plan?
It is easy to set up your own retirement plan called an IRA or individual retirement account. This can be done on your own online or through an advisor. You can invest your funds in many different types of investments depending on your risk tolerance and goals. This is your account for life and there is no need to move it to any retirement plan you might eventually have at work. The IRA is a core account for all people who want to plan for their retirement. Please review all of the rules and eligibility requirements as well as the risks associated with investing.
Pay yourself first. Treat your savings as a bill and set it up for an automatic monthly withdrawal from your checking account. Even $25 or $50 per month adds up in time, and it establishes a good habit. You should consider an IRA, or even better, a Roth IRA. You will not get a current tax deduction for a Roth IRA, but the earnings and future distributions will be tax-free. Over a long saving horizon, this can provide a tremendous benefit to you - having tax-free retirement income. Make sure to build a globally diversified, well balanced portfolio that will provide both offense and defense. If you are aggressive with your investments, the old wisdom said that you might get better long-term returns, but in reality, you are more likely to bail out at the wrong times when the market isn't behaving as you'd like it to, thus harming your long-term returns. In the long run, more consistent returns actually provide higher compound earnings than a more volatile portfolio is likely to.
As a recent college grad beginning to build your financial foundation, consider your other financial goals - in addition to retirement.
Having a contingency fund of 3-6 months of expenses to cover any time you are out of work is an immediate priority. Other possible savings goals: car maintenance, travel, professional development or further education.
Prioritize these goals and be realistic about possible (though not as predictable) expenses. As your income rises you can begin to fund your goals in order of priority.
Elizabeth - you've received some very good answers and sound advice, particularly start early even if you have to start small...and starting with small contributions may be a very important thing to consider. You are at an age where you may want more schooling, or transportation or a home and you need to save for those things, too. One thing to bear in mind is that IRAs are managed by you (the "Individual" part of the Individual Retirement Account) so exercise strict discipline with yourself. Do not put money away that you will need for those shorter-term desires...even if they're good things! Think of your retirement savings as SOLELY for retirement! Many Americans are handicapping their retirement years by accessing their IRAs and 401k plans through loans, hardship distributions or just taking money out.
Fortunately, as other responders have noted, you can start tucking away retirement savings even if you don’t have the benefit of an employer-sponsored 401(k). A Roth IRA is a great option, since it allows you to grow and eventually withdraw your money tax-free. Contributions (which are made with after-tax dollars) are limited to $5,500 per year for the under-50 set, but that shouldn’t be a problem if you’re just beginning to save. Another advantage is that you’re eligible to withdraw your Roth contributions (although not the earnings) at any time without penalty.
After you establish a Roth, setting up automatic monthly payments can help you stay consistent with your contributions. It also makes saving for retirement as convenient as it would be if you had automatic 401(k) withdrawals from your paycheck.
Once you do have a job that offers a 401(k) benefit, you’ll want to take advantage of the maximum employer contribution match. However, even when you’re eligible for a 401(k), the IRS allows you to keep contributing to your Roth as well. Since Roth funds grow tax-free, it may be beneficial to hold on to your account and ramp up your contributions as you earn more money. Rather than being an “either/or” situation, having both a Roth and a 401(k) can benefit you in the long run, since there may be tax advantages to having both tax-deferred and after-tax accounts.
When it comes to saving for retirement, the best thing you can do is start as early as possible. Even if you contribute just a little money to a Roth each month, if you start now, you may find yourself better off in your golden years than many of your peers.
Elizabeth, congratulations on being so far ahead of your peers in terms of financial wisdom. Time is the biggest asset that anyone has when it comes to building wealth. For example, the $24 that Minuet paid to buy Manhattan 388 years ago would have grown to nearly $4 billion today at just 5% interest, without another dime being added. You may not have 388 years, but the principle’s the same. Others have given you good advice about using a Roth IRA to begin saving. In the future, most people will have to provide for their own financial security so don’t look for either a company or a government to provide for you. You already have all the tools you need; make use of them. There is one other piece of non-financial advice that I would give you: broaden your horizon beyond your local area when looking for a job. Look well beyond your city and your state. There are many places in this country where the economy is doing well. Use on-line job hunting search engines and don’t be afraid to relocate. Good luck.
Hello Elizabeth, Great question and congrats on starting to think about your retirement before you embark on your new career. Time is definitely on your side. I think a Roth IRA is a good way to start as others have noted, investing in perhaps a low cost Target Date fund or index fund. Contribute regularly, and let the power of compounding work for you. Once you get full time employment, hopefully your employer will have a 401k or other pension plan, that you can participate and contribute from your earnings.
The consensus is in - Roth IRA. With after-tax contributions while you're in a low income tax bracket, you still remain eligible for the Retirement Contribution Savings Credit when you file taxes. Here's a link" http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics-Retirement-Savings-Contributions-Credit-(Saver’s-Credit)
Best of all, you can possibly transfer your Roth IRA into a future employer's Roth 401(k), depending on the plan. Good luck!
While investing for retirement is a terrific idea, you should focus more on investing in yourself. Acquire as many valuable skills as you can. This will increase your earning potential exponentially and provide the income stream to do some serious savings.
A Roth IRA is a fantastic tool for periods when you expect your income to be low relative to where it will be over time. The benefits of paying tax at a low rate, and never paying it on the growth ever again should you keep it there until retirement, often outweigh the tax-deduction.
A Roth IRA has other benefits in that it can act as a back-up savings account that you can access the contributions that you make to it if you absolutely need to. It's obviously not ideal to take out your contributions, but if you are in a position that you may keep savings in retirement accounts and yet are not entirely sure, you can make the contribution and take it back without penalty.
There are programs you can save as little as a few dollars to and grow those contributions as you can. The important part is to start saving.