By: Zach Lundak
It’s the time of year we are all making the rounds to graduation parties. At the most recent party I attended, I was reminiscing on my final days of college.
I was chomping at the bit to trade in internships for a full-time job so I could start funding retirement. You could say I’m a little different than most. If you come across someone who has a new diploma, this article would be great for them to read. Here’s a few tips to start saving for retirement after graduating college:
Start with your workplace savings plan:
Many people will have access to a 401(k) plan through their employer. This allows employees to direct a percentage of their pay directly to a tax-advantaged retirement account. There will likely be a match provided. If you have other obligations (most will) make sure you at least are covering the match. If you don’t, you are turning down free money!
- If you do not have access to a retirement plan at work, establish an IRA or Roth IRA. Vanguard is an excellent company to use with a lot of great information on how to get started.
- Organizations can offer other retirement plans. If you enter education or religion as a career, you may have access to a 403(b). Government and a few large companies offer pension plans. Small companies may offer a Simple or SEP IRA. Talk with your human resource officer and make sure you understand the plan your organization offer.
Raise your contribution percentage:
“Auto escalation” is a great feature that some 401(k) plans offer. It automatically raises your contribution percentage at predetermined intervals. While you may only start out saving enough to get the matching contribution, you should target raising your retirement savings to 15% of your pre-tax pay. Here’s an article that shows why you should do that.
Another great way to hit this savings goal is to save more tomorrow. Saving half of any bonus or raise makes saving less of a sacrifice. This great Ted Talk explains saving more tomorrow.
Follow these rules of thumb:
- Retirement money is for the long-term. Have enough cash on hand to cover emergencies. Pulling money out of retirement accounts when you are young will cost you in taxes and penalties and is a sure way to keep you from reaching your goals.
- Select a low-cost, globally diversified portfolio. Selecting 10 different funds isn’t a sure way to diversify your portfolio. Many people would benefit from selecting a target-date fund. These portfolios align your expected retirement date with how much risk you are taking in the stock market.
- Just start! According to Albert Einstein, compound interest is the eighth wonder of the world. Even if your current savings rate is tiny, your future self will thank you for sticking with it.