As a new graduate, you might be laughing at that title and saying, "You want me to start thinking about retirement now?" Yes, I do. If you are a new graduate, it's the perfect time to begin planning for retirement. There's no pressure, you've got a long time before you need to reach your goal, and it won't take a lot of money now to have a huge impact. Here are five retirement savings moves each new graduate should make.
1. Explore your employer's retirement benefits. The best place to start up your retirement savings is typically with your employer. As soon as you land your first job, sit down with someone from human resources (or an experienced employee) and learn about all the accounts and benefits your employer has to offer. Keep an eye out for matching contributions to your 401(k). You'll want to take advantage of this free money.
2. Start contributing as soon as you can. As soon as you are able to begin with an employer investment account, get with it. Time is on your side. According to the National Association of Colleges and Employers, the average starting income for 2010 graduates will be around $50,000. Let's say you are able to take $20,000 of that and invest for your retirement now. Just $20,000 invested at 22 years old, will become $225,000 by the time you retire if you get a 9 percent annual return. That’s enough to live off of for more than 10 years in retirement. Do the same for your second year of employment and you'll have enough to live on in retirement until you are 94, considering the same 9 percent return and a modest withdrawal rate of $40,000 a year. Isn't it amazing that after only 2 years of retirement saving, you could have enough saved for retirement and never have to save again? Obviously not many people are going to be able to afford a $20,000 investment initially. But there can be huge benefits to starting early.
3. Understand how an IRA works. One of the best retirement tools for young investors, outside of their company plan, is the Roth IRA. You will likely be in a lower tax bracket now than you will be in retirement. Paying taxes on your retirement savings now and never paying taxes on those dollars or their earnings again is a good reason to open a Roth IRA. You can contribute up to $5,000 in 2010.
4. Create a personal investment policy. Throughout your retirement investing career, you'll need something to fall back on when you need to make investing decisions or when you see the market moving up and down erratically. You need an anchor. Consider creating a personal investment policy. It should spell out how risk averse you are, how you feel about taxes, and what your investment goals are. Even if you turn your investments over to an adviser at some point, this will serve as a good reference for them when making decisions on your behalf.
5. Build up a cash safety net. Make it a goal to save up 6 to 12 months of expenses as soon as you can. Creating this emergency fund will help you avoid debt caused by emergencies such as job losses or major car repairs. An emergency fund will also help guard you against borrowing from your retirement accounts in the future.
Phil Taylor is the author of the popular 52 Ways to Make Extra Money. Find out how to save more money and get the latest news on the best online savings accounts and the best online stock brokers at his blog, PT Money: Personal Finance.