How to Prep for Retirement After College
When you’re about to graduate from college, retirement is likely to be one of the last things on your mind. You might be busy trying to figure out what your next steps are – whether that’s finding a new job, moving to a new city or pursuing another degree. You might think that retirement is a far away priority, but there’s really no better time to start saving for a more successful and stable future. Here are a few simple tips to help you start preparing for your retirement, even as early as when you’re about to graduate from college.
Do Your Research
If you’re still in school, consider adding a personal finance class to your course load. Many colleges offer some form of finance, accounting, or business class that can help you better understand your finances once you graduate. You might be able to sign up for a seminar program or extra-curricular personal finance course. Check with your student life office to see what’s available to you.
If you’ve already graduated or your school doesn’t offer these programs, there are plenty of free resources available online. Start researching the stock market and how it works. Spend some time watching the market fluctuate before you start investing your own money. You might want to try looking for a free market simulator that lets you make simulated investments. Simulators are a great way to dip your toes in the water without risking any real money.
Start As Soon As Possible
It’s in your best interest to start saving as soon as possible for retirement after college . The longer your money is in a retirement account, the more time it has to compound with interest.
If you have a job in college, you can start a retirement account while you’re still in school. If not, plan on opening a retirement account as soon as you land your first job. Investing just $10 a paycheck quickly adds up to a few hundred dollars over the span of one year. This can make a big difference when you’re ready to retire.
You might think you’re not making enough money to invest since most financial institutions want to work with investors who have lots of money. However, the availability of savings accounts and retirement-specific accounts with no or low-fee options has increased over the years. You should be able to find an account that allows you to invest a small amount now so you can start earning.
Consider Retirement Account Options
Once you get a job, see if your employer offers a retirement program, such as a 401(k). There are also standalone accounts such as an Individual Retirement Account (IRA), which you can open, separate from your employer.
A 401(k) is a type of employer-sponsored retirement plan. Since it’s offered through your employer, you’ll have to open the account with the financial institution where the plan is held. You’ll also only be able to choose from a list of approved investments. A 401(k) offers tax benefits based on certain designations of your account. It’s best to check with a tax advisor to help you decide the best tax strategy for your 401(k).
Your 401(k) is a great tool to earn more money for retirement if your employer offers a matching program. Employer match programs match a percentage of your contributions to your 401(k) up to a certain portion of your salary. Companies aren’t required to offer a matching program. If your employer does offer a match, it’s important to max out the contributions so you get the most out of the program.
For example, your employer offers a 50% match up to 5% of your annual salary. Your salary is $50,000 and you contribute $2,500, or 5%, to your 401(k). Your employer contributes $1,250, or 50% of your contribution, of the company’s money to your account as part of the match program. If you only contribute $1,500, or 3% of your salary, your employer would contribute $750 to your account. You want to make sure you maximize the employer match, otherwise you’re leaving money on the table.
Individual Retirement Accounts (IRA)
An IRA can help you start saving for the future right away with a tax-advantaged account that allows you to save money on taxes as you save for retirement. As the name implies, IRAs are individual accounts that you manage yourself. They’re not associated with your employer, so you get to choose where to open the account and what investments to make.
There are two different types of IRAs: Traditional IRA and Roth IRA. Most of the time, contributions to Traditional IRAs allow you to deduct your contributions from your taxes. Contributions to a Roth IRA go into the account after paying tax on the money, but you often get to withdraw earnings tax-free in retirement. Consider consulting with a tax advisor and doing additional research to help you choose the right account for your financial situation.
Choose a Bank for Your Finances
Retirement accounts aren’t the only type of accounts to think about when prepping for retirement after college . You probably had a basic checking or savings account throughout college. It’s a good idea to review your accounts after graduating to see if they’re still a good fit.
Many college students use the same bank as their parents and haven’t given it a second thought. As you enter the workforce, you might find you need more from your bank. Review your existing bank accounts to see if they’re helping you reach your goals.
For example, you might have a simple savings account that you previously used to save random gifts or money from a part-time job. When you start working full-time, you’ll likely be making considerably more income than you did as a student. Consider opening a savings account specifically for emergencies. Building an emergency fund is an excellent way to protect yourself against unexpected expenses, such as a car repair or medical bill. Aim to have 3-6 months’ worth of living expenses saved in your account. Look at a variety of different savings accounts and consider talking to a banker so you have a better sense of what is the best fit for you at this time in your life.
You might also want to switch banks completely. Switching banks could make sense if you’re going to take advantage of a specific account type or new-account offer from a different bank. If you moved after graduating, opening an account with a local bank is usually a good idea so you can easily access your money in your new location.
A student who moves to Hawaii, for example, could benefit from a new account with a local bank. Local banks in Hawaii, like American Savings Bank, can help provide insight into the local economy and help set you up for financial success in your new location.
Don’t Touch Your Money till Retirement
Perhaps the most important tip to get ready for retirement after college is to avoid taking out money you’ve saved. Imagine you get your retirement account statement and see you have several thousand dollars saved. It can be tempting to withdraw your retirement money to use for current expenses.
Avoid this temptation by treating your retirement accounts as if the money doesn’t belong to you. To help you resist withdrawing funds, remember that you’ll probably face taxes on the money you withdraw, as well as penalties for withdrawing funds before you’ve hit retirement age.
Not sure where to start? Consider taking a financial checkup to get a baseline on what your immediate next steps should be. If you start saving for retirement right after graduation, you’ll set yourself up for a successful retirement and be rewarded with compounded growth on the money you invest now.
Investopedia Stock Market Simulator: https://www.investopedia.com/simulator/
Wall Street Journal Guide to 401(k): https://guides.wsj.com/personal-finance/retirement/what-is-a-401k/
Nerdwallet IRAs: https://www.nerdwallet.com/article/investing/learn-about-ira-accounts