Did you know that if you are a recent graduate, you are in the best position of our life to begin saving for retirement.
Most new college graduates aren’t thinking about their eventual retirement from the workforce, but they should be. The financial decisions you make at a first job can set you up for a lifetime of financial success and a comfortable retirement. Here’s why you should begin saving for retirement with your first paycheck:
A 401(k) match is likely going to provide the best return you can receive on an investment. If your employer offers a 50 cent contribution for each dollar you save up to 6 percent of pay, you will get a 50 percent return on that investment. That doesn’t even include investment gains! If you save $1,000, you will get an extra $500 from your employer. You want to join as soon as you can, and you want to contribute as much as you can. If you can’t afford to contribute the maximum, try to contribute enough to get as much of that employer match as you can. This is free money! And who doesn’t like FREE money?
Putting money into a retirement account at an early age gives it more time to grow. The results of compounded investment gains can be impressive over a 40-year career. If you save just $2,000 per year beginning at age 22, you will have over half a million dollars by age 65, assuming 7 percent annual returns. And if you received an employer match on that $2,000, you would have nearly three quarters of a million by age 65. If you wait until age 35 to start saving, you’ll have to save over $5,000 per year to hit half a million dollars by age 65. Saving early means you can save smaller amounts and let the interest on your investments do the rest of the work. If you can get critical mass early in life, then everything is going to be a lot easier later on in life. The portfolio is doing most of the heavy lifting!
Saving for retirement in a traditional 401(k) or individual retirement account lowers your tax bill each year. For someone in the 15 percent tax bracket, putting $5,000 in a 401(k) or IRA will save you $750 on your current tax bill. If you’re in the 25 percent tax bracket, the same contribution will save you $1,250. Income tax won’t be due on your contributions until you withdraw the money, and it can be deferred until age 70½, at which time withdrawals become required.
Young investors with low incomes also have a lot to gain from investing in a Roth IRA or Roth 401(k). Roth accounts allow you to pay income tax at your current rate, and then withdrawals from accounts that are at least five years old will be tax-free in retirement. If I was in the 15 percent tax bracket, I would probably save through the Roth. If you are in the 25 or 28 percent bracket, you would probably contribute to the deductible IRA, and you would just base it upon what your tax bracket is.
Workers who earn small salaries at their first job but still manage to save for retirement may additionally be able to claim the saver’s credit. Individuals with an adjusted gross income of less than $30,000 in 2014 who contribute to a 401(k), IRA or similar type of retirement account are eligible for a tax credit equal to 50, 20 or 10 percent of the amount contributed up to $2,000, with the biggest credit going to those with the lowest incomes.
One of the most valuable features of 401(k) plans is that the money is withheld from your paycheck before it ever hits your checking account, so you’re never tempted to spend it. I know getting motivated to save for something that will happen 25 or 30 years from now is tough. Virtually every successful savings plan includes an automatic component. If you don’t have a 401(k) account at work, you can recreate this effect by directly depositing a portion of your paychecks into an IRA, savings or investment account.
If you are looking for more way’s to save then grab my FREE report, 54 Way’s To Save Money, and let’s build that retirement fund.