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Probably the last thing you’re thinking about on your college graduation day is how you should start saving up for your sunset years. No, you’ve got grad parties, post-grad backpacking trips, and the promise of a fulfilling career on your mind. But thinking about personal finance ahead of the game could seriously pay off in the long run.
Exactly how much do you need to save up between the start of your career and your retirement? Experts say you need approximately 80% of your annual salary to retire comfortably. So if you made $100,000 per year pre-retirement, you’d want to have a retirement savings of around $80,000 a year. When you’re starting out entry-level that sounds like an impossible number to reach, but by planning and saving ahead of time, it’ll be much more attainable.
Take advantage of employer-sponsored 401(k) plans ASAP
Ask any career expert what they wish they would have done at the start of their career and they’ll likely mention something about establishing their 401(k). Yet so many college grads still don’t know the ins and outs of these retirement investment plans or why so many people sing their praises.
401(k) definition: A 401(k) is a type of retirement savings that’s typically administered by an employer. This savings account allows employees to redirect a portion of their monthly paychecks into a tax-advantaged account that they’ll be able to access once they reach retirement age. What’s more, some employers will also match a certain percentage of employee contributions, helping to boost the account’s total savings.
The other major benefit 401(k) plans offer employees is the fact that they are considered tax-advantaged. When you put money toward your plan it’s not subjected to income taxes for that year. Instead, the money is taxed when you withdraw it later on down the road.
Because 401(k)s are tax-advantaged accounts, the IRS places limits on both employee and employer contribution limits each year.
Maximize Employer Match
As I mentioned, some employers are generous enough to help fund their employees’ efforts to save toward retirement. Of course, they won’t have endless dollars to give out, but many will contribute an average of 4.3% of the employee’s contributions. You can look at this as a thank you gift for all of your hard work, so make sure you’re taking advantage!
Consider alternative retirement savings options
Not all employers offer 401(k) plans, but you shouldn’t count out your options for retirement just yet — there are plenty of other retirement plans that you can enroll in that offer similar, if not better perks depending on your situation.
Take a look at these savings options to get started:
- Individual Retirement Arrangements (IRAs)
- Roth IRAs
- 401(k) Plans
- 403(b) Plans
- SIMPLE IRA Plans (Savings Incentive Match Plans for Employees)
- SEP Plans (Simplified Employee Pension)
- SARSEP Plans (Salary Reduction Simplified Employee Pension)
- Payroll Deduction IRAs
- Profit-Sharing Plans
- Defined Benefit Plans
- Money Purchase Plans
- Employee Stock Ownership Plans (ESOPs)
- Governmental Plans
- 457 Plans
Think outside the box
Depending on your financial situation and individual lifestyle, a retirement plan like we listed above may not make the most sense for you, or you may not be in a position to enroll just yet. Don’t panic, there are plenty of other options to leverage and start saving for your golden years.
Check out these creative savings options:
- Rather than spending your salary raise or holiday bonus, consider setting it aside to enjoy in retirement.
- Use coupons or online promo codes to help you save on purchases, then transfer the savings to your retirement account.
- Enlist the help of a savings app like Acorns, which rounds up your purchases and directs the rounded up amount into your savings account.
- Consider your personal wealth in terms of a personal portfolio of investments and savings rather than simply a salary number. And keep in mind that 31% of employers run credit checks on potential candidates - double the reason to consider keeping investments to help boost your score.
- The next time you’re issued a tax or ETF return, think about reinvesting it into your financial future.
- Join in on the gig economy craze and pick up a job freelancing part-time. You can use some or even all of the money earned to help fund your retirement.
- Make sure your savings accounts are set to earn the most compound interest possible — this really adds up over time!
- Set aside some of your college graduation money into a savings account or investment vehicle.
Plan ahead for life during retirement
While saving early on is a big part of retiring comfortably, it’s certainly not the only option. There are plenty of things you can do to subsidize your retirement savings. From reverse mortgages which convert home equity into cash, to simplified approaches like getting a part-time job, there’s no need to be overly stressed about this stage in life. It’s all about preparation, planning, and education.
By understanding the options that are available to you, you’ll be in a better position to really enjoy the fruits of your labor once you resign from the 9-5 lifestyle you’ve become so accustomed to.
The Bottom Line
Saving up 80% of your annual salary probably sounded near impossible at the start of this post, but hopefully these tips will help you find your way. Let’s review the five ways you can start saving for retirement as a new college grad:
- If your employer offers 401(k) benefits, take advantage! Not only do 401(k)s create a space for you to save, but you can also enjoy tax deferrals, employer-sponsored contributions, and compound interest.
- If your employer matches employee contributions, definitely take them up on it! You can think of this as a thank you gift for all of your hard work and commitment over the years.
- Whether or not your employer offers 401(k), take some time to consider which retirement plan would work best in your situation. From IRAs to Thrift Savings Plans, there are plenty to choose from depending on your professional life and personal circumstances.
- Even if you’re not in a position to open a retirement savings, there are still plenty of options to plan for the future. By implementing creative budgeting tips you’ll start to see your savings grow in no time.
- Remember that you don’t need to have all savings covered by the time you reach retirement age. There are several solutions that can help you make up for lost time.
Above all, remember to really enjoy this unique stage in your life — you’ve got so much professional and personal growth ahead of you so don’t forget to stop and smell the flowers!
Noelle Fauver is a contributing editor for 365businesstips.com. She has a B.A. in Communication Studies from California State University, Northridge and experience in marketing, copywriting, and small business management. She volunteers on the board of the San Diego American Marketing Association as the Event Experience Chair to help local marketers in the area develop their professional repertoire and connect with other engaged professionals.