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.
[Read: 10 Financial Tips for College Grads.]
Get a retirement account. College graduates presented with the option of retirement benefits through their first employer should look for a variety of investment choices, low fees on the investments provided and retirement education opportunities, Fragasso says. "There should be at least an annual education class ... [or] availability of 401(k) representatives to help council the individual employees on their choices."