Welcome to the real world, college graduates.
Saving for retirement is probably near the bottom of your financial to-do list, after paying the rent, making student loan payments and trying not to spend all of your free cash on takeout food and Uber rides. But opening a retirement account in your early 20s is a major part of “adulting” and can have lots of financial benefits.
If you start saving now — even just a little — you can give your money a much better chance of being able to grow in the stock market over time, says Rachel Rabinovich, a financial planner for the Society of Grownups, a financial company that helps millennials learn the basics of managing money. (Investing also can come with risks, but for long-term goals such as retirement, you would have plenty of time to make up for any losses you might see in the near term, financial experts say.)
Here are some tips from personal finance experts about what you should do to make saving for retirement as easy as possible.
Start right away. Adjusting to a new job can be overwhelming, but don’t use that as an excuse to push aside your 401(k) paperwork, financial experts say. Take care of your retirement account at the same time that you are tackling other essential work tasks, such as choosing a health plan, says Rebekah Barsch, vice president of planning for Northwestern Mutual. That way you can get used to having the retirement contributions deducted from your paycheck early on before you can even tell that the money is missing, she says.
It’s okay to start small. You might not be making the big bucks yet, but waiting until you earn more money to start saving for retirement can cost you. Saving even just a little now can pay off later since the money will be able to grow in the markets over time, says Rabinovich. But if you put off retirement saving until you’re older, you’ll have to save much more to make up the difference, financial experts say.
Take a 25-year-old earning $40,000 who starts off saving 6 percent of his paycheck. He would have a 75 percent chance of having enough money in retirement, according to an analysis from the Employee Benefit Research Institute. But if he waits until age 40, when he’s making $72,000, he would need to save more than twice as much — 14.5 percent of his pay — to have the same chance of having enough money in retirement.
Know the basics. If you’ve never invested before, terms like “small cap” or “large cap” may make the whole process of choosing a plan feel intimidating, says Erin Lowry, the author of “Broke Millennial: Stop Scraping By and Get Your Financial Life Together,” a personal finance book being released in May. The financial firm managing your retirement plan should have someone you can talk to about how the different funds work, she says.
But don’t let fear keep you from opening the account, Lowry says. “You just kind of shut down, and then before you know it, it’s been three years,” she says. Young workers should at least understand the purpose of target-date funds, Lowry says. Many plans offer these funds, which automatically adjust how a person’s money is invested based on their age and how close they are to retirement.
Consider an IRA. If you are working at a start-up or freelancing, you probably don’t have a retirement plan through your job. But you can still save for retirement by opening an individual retirement account, or IRA.
There are two main kinds of IRAs. Through a traditional IRA, you can receive a tax deduction that can lower your tax bill. You’ll owe taxes later when you take the money out in retirement. With a Roth IRA, you don’t get a tax break now, but the account can provide tax-free income in retirement.
Figure out how much you would need to save each paycheck and have the contributions deducted automatically from your bank account, Rabinovich says. You can contribute up to $5,500 a year to an IRA (though the limit increases to $6,500 after age 50).
Increase your contributions over time. Financial advisers generally recommend that you save between 10 percent and 15 percent of your pay for retirement. If you’re not quite there yet, you can work toward that goal by increasing your contribution rate over time. Bump up your saving rate by one or two percentage points every time you get a raise, Barsch says.
Some plans let you sign up for automatic escalation, so that your contribution can be increased by one or two percentage points each year. If your retirement account doesn’t offer that, choose a date each year, such as your birthday, to serve as a reminder to save a little more, Barsch says.
You should also try to stash away part of any extra paychecks you receive, such as a bonus, a tax refund or checks earned from a side gig, Barsch says. But don’t deprive yourself too much. If you plan to treat yourself with at least part of the money, it might make it easier to commit to saving.