When it comes to retiring, your grandparents had it easy. They had pension plans and Social Security, and it was all done for them. Now, pensions—and perhaps Social Security—may be a thing of the past. On top of that, rising Medicare costs and inflation make saving for retirement when you’re young more important than ever.
The good news is that there are several ways to save. And as it turns out, it’s pretty damn easy.
But where do you start? Any financial planner (or nagging parent) will stress your need to set up a budget. Erin Tait, 22,a cook from Lincoln Park, says she puts one-half of every other paycheck in her savings account, and the rest goes in her checking account. “I’m young,” she says. “I just got out of school. I’ve never really thought about creating a budget before.”
And it turns out Tait’s on the right track—saving starts with your paycheck. “You have to have money going into a savings account or a retirement plan, something that happens immediately upon getting paid,” says Brent Rosen, a financial planner with Bannockburn, Ill.-based GCG Financial, Inc. “It’s important you get a grasp of where your money is going on a monthly basis.”
If credit card or student loan debt is on your mind, it’s still possible to save for your retirement. (Just pay off those high-interest credit cards first.) Stuart Ritter, assistant vice president of Baltimore-based T. Rowe Price Investment Services, recommends you start saving as soon as you get out of school. “If you start right as you’re coming out of college, you only need to save 10 percent of your salary until you retire at age 65,” he explains. “ That’s not much— some people are spending more than that on their monthly cell phone bill. If you wait until you’re 35, you need to save 18 percent of your salary. [By waiting], you’re doubling
the amount you need to save.”
A 401(k) is a good start. If your employer offers 401(k) accounts, you can have pre-tax money taken out of your paycheck and put in an account toward retirement. Better yet, many companies will match the money you put in—up to a point, which is usually about a six percent contribution. “Always put enough in to get the match—it’s free money,” Rosen says. “ There’s no mutual fund in the world that will give you a 100 percent return.”
Another good option is to tuck away some extra money in an IRA . (It stands for Individual Retirement Account, and it’s essentially a bank account you don’t crack open until you retire.) There are two types: traditional and Roth. A Roth IRA is probably what you’re going for, since you likely make less than $101,000 or $169,000 if you’re married—the current income limit for Roth contributors—and it’s recommended for most people, since the money you contribute is taken out after taxes, so you don’t get taxed again when you retire.
With IRAs and 401(k)s, you’ll find you can choose from a mix of short- and long-term stocks, bonds and mutual funds. (If you own stock, you own a share of a company; a bond is essentially a loan the company agrees to pay you back.) If you’re young, your best bet is to put your money in stocks. “[When you graduate college], you’ll be investing for 30 to 40 years, so the price of whatever you want to buy will [hopefully] have gone up a lot by the time you retire,” Ritter says.
If thinking long-term is out of the question, Ritter suggests you try saving for three months. “Go to your employer, get the 401(k) forms, and contribute 10 percent of your paycheck to a 401(k). Live your life for three months,” he says. “ The rest of your budget will have adjusted and you won’t miss your money. If you can’t do that initially, save enough to get the match and increase the amount you save by two percent every time you get a raise. Don’t overestimate how difficult it is to save.”