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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.”

While starting earlier makes a huge difference, it is important to put the investments in the best vehicles for the future. Tim Maurer, director of financial planning at the Financial Consulate, says, “Use the 401(k), but only up to the contribution amount that will be matched initially. You need to take the free money that you get through a match, but beyond that, you need to start saving money for emergency reserves and a house.

A better way to save for these situations and purchases is to put the money in more liquid accounts. Money in a 401(k) cannot be touched until retirement without penalty. However, while it is unknown to many, a Roth IRA does not function in the same manner. According to Maurer, “You are able to take the full amount that you have contributed to a Roth IRA at any time with no exceptions. So, if you put $10,000 in over the course of 3 years and it grows to $14,000, you can go in and take out the $10,000 at any time; it is only the gain that is subject to penalties if you withdrawal before age 59 ½.” With that said it is suggested to keep the money in saving but as young people the future is unknown and surprise expenses could arise at any time and the Roth IRA is a great way to save but also have access to the money.

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