The last thing recent college grads are thinking about is retirement but, it may be something to move up on the list of things to plan for.
As thousands of twenty-somethings descend upon the workforce in the coming months, many will be given the option to contribute to a company sponsored 401(k) and all have the option to open an Independent Retirement Account (IRA). While saving is always a good idea what many recent grads don’t realize is how just how important timing is to their bank account.
Consider this tale of two investors from Jay Berger, a certified financial planner in Traverse City, Mich. If one investor contributes $2,000 each year to an IRA starting at age 21 and ending at age 25, the money that he has invested will compound to be $552,625 by the time is he 65 and ready to retire. In contrast, if another investor decides to start contributing $2,000 each year to his IRA later in his career, at age 35, and continues to contribute up until retirement, his money will only have compounded to $361,887 and he will have had to invest more of his own cash.For many, post-graduate life is the first experience of really leaving home and the financial support of mom and dad. It can be confusing and easy to mismanage the money the new found income that comes with a career. But, Stuart Ritter, a certified financial planner with T. Rowe Price (TROW) says that new graduates should begin saving 20% of their salary from the first day of work; 10-15% of it should go into their employer’s 401(k) plan or a Roth IRA and the rest should be set side for their other goals like a car or house down payment.
Ritter says, “If your starting salary is $40,000, putting 10% into your retirement plan means only $4,000. From what you’d give up each paycheck, that’s only about $100. You’ll never even miss it. The longer you wait to start, the more you’ll have to set aside.”