Retirement 101: How college students can get ahead with early saving

It’s never too early to start planning for retirement. Once a steady paycheck is being received one should start putting money away in order to live comfortably once their golden years arrive. This can occur as early as high school, college, or your first career job. Having a retirement plan in place at an early age can help lead to a calm state of mind and well being. Even for young people, retirement planning can ensure that you will have the capability to continue living a comfortable, secure lifestyle later in life.

No matter where you are in life, retirement is inevitable. I am about to start my own adult journey and career once I graduate next year. Retirement is not something that most people of my generation pay a lot of attention to and it can be very simple to accomplish if you plan early and start to plan as young as you can.

People who have been successful in planning retirement have one message for young people starting their retirement journey: start now!

“I do feel ahead of the curve because I have been saving for retirement for seven years now, maxing out a Roth IRA,” said 2023 college graduate Mary Claire Gasman. After Gasman added “I am just over 3 years into a full time career where I have been investing into my retirement with every paycheck.” Another young retirement investor, Adeline Kikut, stated “It’s important to start investing early because your money will have more time to grow to its full potential.” Gasman and Kikut are both in the early stages of their careers.

I also spoke with Jennifer Keltner who has been in the financial services industry for the last 29 years and a financial planner for 14 years. Keltner gave two key pieces of advice to planning for your future. Keltner first key, “Sign up for a retirement plan on day one and they will automatically take money out and you won’t know the difference.” Her second key, “Pay yourself like you’re paying your bills. You are a bill that you have each month. And make sure that is the first bill you pay!”

Coryn Hicks, ​​investing reporter, and finance writer used the above picture to illustrate how the ages at which Jack, Jill, and Joey started to invest significantly impacted the growth of their retirement funds. Another advantage to starting early on in your career is that it might allow you the ability to stop earlier or put less in later. Time is essential when investing for retirement.

“Time invested is so important that Jack can even stop adding to his investments and still have more than Jill at age 65.” expressed Hicks.

Gasman added, “I’ve had a Roth IRA since I was 18 years old to begin investing for retirement.” Traditional Individual Retirement Accounts (IRA) are known for the ability to grow earnings with the tax being delayed. Traditional IRAs have limits set in place for the amount an individual can add to their account each year. However the nice thing is that there are no limitations to income needed to open an account. Lastly, you may be able to qualify for your contributions to be tax deductible depending on certain factors. Factors include having retirement which is not endorsed by your employer and level of income.

A Roth IRA is an investment that you can open when you begin working. It is beneficial because there are no minimum balances to open and they are opened with post taxed money. This allows you to grow the money you put in your personal retirement account tax free. Roth IRA’s have capability for you to do this because it gives you the option to invest money that you have already paid taxes on. After having the account opened for five years your earrings can be withdrawn without facing penalties or needing to pay taxes if you’re at least 59 ½ or older. A traditional IRA also allows you to save, but this money is pretaxed. It allows you to keep more of the money you earn, but when you withdraw it at 59 ½, it will be taxed. That is why the Roth IRA can be advantageous, when you aren’t making a lot of money.

In the article, “6 Things to Do If You’re Nearing Retirement,” Charles Schwab recommends opening a Roth account if you are not in as high of a tax bracket “If you’re in a lower bracket (0%, 10%, or 12%), consider maxing out your Roth savings, where you pay the taxes up front, because your tax bracket in retirement is likely to be the same or higher than it is today, said Rob Williams a Retirement Income Certified Professional at Charles Schwab. A Roth IRA is an investment.

However if your income places you in the middle bracket you may be better off, “splitting your retirement savings between tax-deferred and Roth accounts so you can benefit from both tax treatments. You might also want to consider additional savings in an HSA.”(Williams)

In addition, various people interviewed shared that as you continue to earn more, your savings, and investments should also increase. Dennis Grinsell stated, “Generally, when I got a promotion or a raise, I put more into my retirement account than I had to, so it ensured I had more for my retirement years.” One of his key strategies was to always live below his means. Other than his home and investment property, if he couldn’t afford it, he didn’t buy it.

Mr. Grinsell has been retired for over 20 years. He also shared that he knew he would be able to retire, “Because my living standard does not deplete my monthly income every month. You may never know if you have enough, but at my stage and age in life, I have enough to do everything I want to do and still have a little left over, like buying butter and chocolate chips — the essentials.”

It’s also extremely important to know that some retirement accounts have limits to them but there are advantages if you’re aware.

Roger Young, a CFP at T.RowePrice mentioned that the first step is to “check your retirement savings progress.” Once you reach 45 years old is when it is especially important to pay attention to your progress for the next ten years.

An analysis by T. Rowe Price suggests that 45-year-olds should have three times their current income set aside for retirement. This savings benchmark rises to five times current income at age 50 and seven times current income at age 55.

Fortunately, there’s still time for even modest adjustments to have a large impact down the road. If possible, aim to contribute the maximum amount to your retirement accounts. Moreover, your retirement contribution limits increase in the form of “catch‑up” contributions once you turn age 50, allowing you to focus even more on saving what you need to reach your target.” For example in the following chart, it shows that the standard contribution to an IRA is $7500 a year. When you turn 50 that amount increases to $1100. This allows you to save more in your later years.

It can be easier to take advantage of the limits to your savings and retirement accounts if you know what the ideal contributions are for each contribution. Young used this illustration to show the reader the different retirement savings accounts and the contributions that go with them.

This chart can also be helpful to show you the amount you can contribute to the different types of savings. Notice that age also plays a factor. People in a higher tax bracket would be more likely to pay into a 401(k). Due to a higher tax bracket, the amount of your taxes in retirement will be similar in retirement or less than your current amount. As mentioned in a retirement article by Charles Schwab, “It may make sense to maximize your tax-deferred accounts — such as your 401(k), 403(b), 457(b), or Thrift Savings Plan.”

When looking into setting up a 401(k) it’s important to know the difference between a traditional 401(k) and a Roth 401(k). Contributions to a traditional 401(k) are formed before tax and the taxable income you are currently earning is lowered. “If I were to start over I would use Roth 401k for retirement and an ETF for taxable savings. A Roth 401(k) comes out of your paycheck and you don’t pay taxes now but you do when you are retired. A more tax efficient way of retirement is having a Roth 401(k) in place.” stated financial planner, Keltner.

A 403(b) plan has two different parts. If you are employed through a public school you will have a savings plan for retirement that has tax advantages. Although, if your employer is through a non-profit or church your retirement savings account may be tax exempt if it is through a 501(c)(3) organization. When comparing the 403(b) and 401(k) retirement plans they both provide the ability to put money in before taxes in order to decrease your taxable income. While there are similarities to these retirement plans, the main thing to remember about the difference between a 401(k) and 403(b) retirement is the first plan mentioned is used for for-profit companies and the second plan mentioned is intended for non-profit/educational associations. A 403(b) plan is also similar to a Roth account where the money earned can mature with the tax being remanded until the point of withdrawal.

To sum it up, Retirement 101 begins with addressing one’s retirement needs early. Ideally “early” means in one’s late teens or early twenties or whenever you begin earning a paycheck. A general rule of thumb is to start with 10–15 percent of one’s income, but if that feels like it is too much- even as little as five percent is a good start. One can always increase their financial commitment later.

“Start early in saving,” said 20+ year retirement investor Sabrina Schreder. “The sooner you start saving and investing, the better off you will be in your retirement. The longer one’s money can grow through compound interest, the better. I have been paying into a pretaxed 403(b) to prepare for when I retire.” Building long term financial security will lead to greater peace of mind for the future. A penny saved and invested can be a lot more earned-start early!