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."
Company-provided 401(k) plans often have the benefit of a company match, which can increase retirement funds dramatically over time. For those who don't have access to a 401(k), and individual retirement account allows savers to take advantage of compound interest. Savers have the option of a traditional IRA, in which contributions aren't taxed until you withdraw them during retirement, or a Roth IRA, in which funds are taxed before being added to the savings, but withdrawals are not taxed.
Young workers generally have the most to gain by saving in Roth accounts. "For retirement purposes, a Roth is a really wonderful tool. It's tax-sheltered. It's all going to grow tax-free," Helm says. And in the case of an emergency, you can always pull out money you contributed without penalty or tax, he adds. The Roth IRA is a particularly advantageous option for young savers who are likely in a lower tax bracket than they will be upon retirement.
Students moving from job to job in their early careers can expect the money they've already saved to follow them, Fragasso says. "[Other] than the unvested portion of the employer's contributions, it's going to follow you, and you have the option of either rolling it into your new employer's plan … or doing your own IRA rollover."
The IRA rollover may be a smart option for workers changing jobs, Helm says, because it simplifies the number of accounts they have to manage. "Get [your accounts] consolidated into as few places as possible because it's a lot easier to keep track of," Helm says. He also warns that students should avoid pulling the money out of the account, as that can lead to fees that significantly reduce the money saved.
Develop a habit of saving. Simply getting started can be the most important step toward retirement – and one of the most difficult. "No matter what the other pressing demands are, put something away, because when you get out of the habit of saving, you stay out of the habit," Fragasso says. Continuing that habit throughout a career is as vital as starting off right. "Consider that the horizon until retirement, while distant, is nevertheless finite," Fragasso says. "Figure out that every month you don't contribute for yourself is a paycheck wasted and the lost opportunity of compounding for decades on that money."