So you worked your way through college, received your degree, and are fortunate enough to have landed your first full-time position out of school. For many people, the leap into the “real world” is a bit intimidating, while others are thrilled to put classes, homework and exams behind them and start working. Many individuals will be earning a substantial salary – higher than they’ve ever earned before – and with that comes an increase in expendable income. It can be tempting to put that money towards a fancy apartment, a big screen TV, or even a new car, but in order to adequately prepare for your financial future, it’s important that you start saving right away. Here are some tips on how you can start saving for retirement once you land your first job out of college.
- sign-up for the 401(k) immediately (or as soon as you’re eligible)
- commit to a 10% savings rate before you get your first paycheck
- save as much as you can… regardless of whether the company matches or not
- find out if your plan has both traditional and Roth 401(k) savings options
- study what investment options are available for you and determine what fits best
Why wait? The sooner you can sign-up to start saving, the better. You will only end up with more money when you are ready to retire (and no one ever complains about having too much money in retirement). The longer you wait, the harder it is to let go of the money and put it in a savings account.
Start-off on the right track by saving as much as possible. It is amazing how you will find a way to live off of your net pay when you get it. As mentioned earlier, if you start with a higher net pay, you will likely find a way to spend the money. By starting with a higher savings rate, you can learn to live within your means while also putting a larger amount of money away.
Too often people say, “I’m only going to save 3% because that’s how much the company matches.” It is almost as ridiculous as someone saying, “I’m not going to save in my 401(k) because the company doesn’t match.” You are the only person that is going to provide for yourself in retirement. The most influential way to prepare for your future is to save. If the company matches, great! If not, who cares? You should be saving either way!
It is a good exercise to look at whether or not your 401(k) plan has a Roth 401(k) option and learn the difference. The traditional 401(k) is pre-tax contributions that accumulate tax-deferred. You will pay the taxes when you retire. The Roth 401(k) is an after-tax contribution that may be withdrawn tax-free for retirement*. There are multiple factors that can determine why one option may be better suited for your situation, so it’s important to not listen to generalities… learn about what makes the most sense for you!
Most plans have easy-to-use investment options. Make certain you take a bit of time to learn what may be best for you. More often than not, you can find an investment to accommodate whether you want to be more conservative or aggressive with your assets, as well as an investment that is based on how long you have to invest your money. You can always get help.
Pay yourself first! By waiting, you make it more difficult to invest in your long-term plan. As I mentioned earlier, you get used to the higher spending amount when you aren’t putting money away. Pay yourself first by saving for your future.
The sooner you save, the more money you may have when you are ready to retire. Don’t get hung up on what you think or may – or may not – be a good deal. Bottom line, saving as much as possible, as soon as possible is the most important goal for your future.
Most people do “mental accounting” when it comes to budgeting. They get their paycheck and they see what the net pay is and budget in their mind accordingly. Take a few minutes every month budgeting how you are projecting to spend your money. Then reconcile how you spent your money. You will be much happier when you are not caught-up in a financial crisis while waiting for your next paycheck to arrive.
You will likely change companies a few times during your life. When this occurs, consider moving your money with you to either a new 401(k) or to a Rollover IRA. Never take the lump sum distribution from the plan (there may be significant taxes and penalties if you do). It’s important to keep your money working for you as long as possible.
Let your plan work for you! The longer the money is invested, the more it can potentially earn for your future. If you have been doing what we suggested throughout this article, then hopefully you won’t find yourself in a situation in which you may be tempted to borrow funds from your 401(k) plan. Unfortunately, it is easy to do and because of this, we see people do it too often. Be diligent!
Don’t ever allow yourself to fall into the mindset that you have the rest of your life to save for retirement. The sooner you start saving, the brighter your financial future may be. Make a commitment to yourself that you are going to make smart decisions with your finances and you are going to pay yourself first. Enroll in your 401(k) as soon as possible, save as much as you can and spend time learning about the different options and investments your plan offers. It’s easy to spend money once you start working, but trust me, you’ll thank yourself down the road if you start planning for retirement right away.
More expert advice about Retirement Planning
Securities offered through LPL Financial, Member FINRA(www.finra.org)/SIPC(www.sipc.org) Investment advice offered through Retirement Benefits Group, a registered investment advisor and separate entity from LPL Financial. The LPL Financial registered representative associated with this site may only discuss and/or transact securities business with residents of the following states: AK, AL, AR, AZ, CA, CO, CT, FL, GA, HI, IA, ID, IL, KS, KY, LA, MA, MD, MI, MN, MO, MS, MT, NC, NH, NJ, NM, NV, NY, OH, OK, OR, PA, SC, TN, TX, UT, VA, WA, WI.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which strategies may be appropriate for you, consult your financial advisor prior to investing. No strategy assures success or protects against loss.
*Limitations and restrictions may apply. Withdrawals prior to age 59-1/2 may result in a 10% IRS penalty. Future tax laws can change at any time and may impact the benefits or tax treatment of the Roth IRA or Roth 401(k).
Photo Credits: Balancing The Account By Hand by Flickr: Ken Teegardin; Check Man, Cross Man and Jump Man © ioannis kounadeas - Fotolia.com