8/12/2013 7:45 PM ET|
Retirement 101 for college students
Bio 101 doesn’t teach about 401ks and IRAs, so here’s our retirement crash course.
College students and recent graduates face particular challenges in saving and planning for retirement. Daunting student loans, a still-uncertain job market and competition for jobs among fellow graduates may all seem far more pressing than a retirement decades down the line, but that doesn't mean post-career planning should be put to the wayside. Here's what college students should know about retirement:
Start saving young. Saving early and capitalizing on years of compounding interest is key to retiring comfortably. "[The] most important thing to remember is that [students] will, in fact, retire someday," says Mark Helm, a certified financial planner in Falls Church, Va. "They can either get one of the great forces of nature -- compound interest -- to work for them, or they can get started late and fight that beast for 30 years."
One of the initial steps toward a successful retirement is one many students feel they've had enough of: education. Most students haven't learned to deal with their finances properly, according to Robert Fragasso, CEO of Fragasso Financial Advisors in Pittsburgh, and that's the first hurdle to a healthy retirement.
Students looking to fill the gaps in their financial education may want to ask trusted family and friends or consider heading back to the classroom. "I would look for adult financial education courses at the college level," Fragasso says. "View those courses with an open mind to become a sponge, but also with a good filter to understand what's truly academic and sound, and what is somebody's bias."
Make a plan to pay down debt
Student loans are likely a part of recent or future grads' finances and factor strongly into their retirement planning. Grads will likely have to pay off that debt bit by bit. Trying to pay down loans as fast as possible may work in some cases, but this can tighten an already small budget, Helm says. "[Students] have to have some money that's not in a retirement account, or at least that's flexible that they can get at."
Recent grads should factor the cost of their loans into their calculations, and pay off the highest-interest debts, such as credit card debt, first. Borrowers can pay down loans with the lowest interest rates more slowly, Fragasso says.
An emergency fund is essential
Students and recent grads should have an emergency fund that can be used for incidental expenses or as a savings account for an eventual down payment on a home. Younger students should be more focused on building up a cash reserve than putting money in a retirement account, Fragasso says.
Factor in Social Security
Social Security is yet another component of retirement that students should get familiar with early on. "Social Security is more than a retirement program," says Kia Anderson, a Social Security Administration spokeswoman. "It is important for young people to know that Social Security is here for them right now in the form of disability and survivors insurance."
Social Security payments are based on the average of the 35 years when you have the most reported earnings. Zeros are averaged in if you don't work for 35 years. Current students can expect to claim full Social Security benefits at age 67, although partial benefits become available at age 62. Keeping track of your income over time will help ensure full benefits will be available upon retirement, Anderson adds.
However, Social Security isn't the only source of retirement income students should plan to rely on. "A person will need other savings, investments, pensions or retirement accounts to make sure they have enough money to live comfortably when they retire," Anderson says.
More from U.S. News & World Report:
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Oh, and one more thing, youngsters.
Stop voting for politicians who compound the national debt at staggering levels instead of creating conditions that will compound your investing efforts.
Is grandpa making to much sense?
It has worked in the past.
Compound interest on what savings accounts pay less than 1 percent you would be dead by the time you're first dollar deposited doubles itself.
When you start that first job, and if you have not already done so, make it a habit to do the following right from the start:
1. Save an emergency fund - leave it liquid and leave it alone - it is for emergencies
ALWAYS keep yourself and your property insured. Health, property and disability
2. Once you have the emergency fund in place, contribute a material amount to your retirement, begin with 10% of your gross. The younger you are when you start, the less it has to hurt - compounding is your friend. Pensions are a rarity and Social Security might not be there - save as if you are going to be your only resource.
3. For every raise, put half of that raise toward an increased retirement contribution percentage
4. Watch account fees closely, do not take contribution holidays and for goodness sakes don't take a loan.
Consider items 1-4 a regular bill - it is not discretionary income. Any income after taxes and the items above is 'take home'. This mindset will guarantee you'll be living at or below your means.
5. Start saving an already taxed amount as you can - put that into good investments
Avoid consumer debt while you are at it...Home, car - fine, but other debt, be very wary - interest
can and will eat you alive. Debt is not good, but some types of debt are worse than others.
6. Ride out downturns and stay steady (do not panic sell) - enjoy contributing while the market is on sale
Somewhere in there, trade rent for a mortgage - do plan to pay it off well before you retire
Fast forward through life (it ends up going faster and faster, believe me) and eliminate worry about retirement replace worry with a pure enjoyment of your retirement years. Your senior-self will thank you for your effort!
Unless you are prepared to live in very very simple Spartan way, you will never be able to retire in all likelihood. Fish, forage, barter
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