for retirement early pays big dividends
last thing new college graduates are thinking about is retirement. But as soon
as they become eligible for their company's 401(k) or other retirement
plan, they should start saving.
"The main reason to start
saving early is the power of compounding,"
says Jonathan M. Heller, CFA, director of
investment communications at the SEI Investment
Management Unit of SEI, a wealth management
company in Oaks, Pa. "The difference
in beginning to save at age 22 versus 32 is
immense. Young people should also be aware
of the tax benefits of retirement savings,
as well as the additional benefit of matching
contributions from employers," says Heller.
Young people seem to be getting
the message that Social Security won't provide
for all -- or any -- of their retirement needs.
According to a survey by InCharge Education
Foundation, 50 percent of 18- to 24-year-olds
are already saving for their retirement. In
fact, saving for retirement (32 percent) ranked
ahead of saving for a house or a car (7 percent)
or paying off debts (1.4 percent).
of what the saving goal is, it's tough to save with a relatively low starting
salary and a world of new expenses -- from apartment rent to paying off school
loans. But getting in the habit of saving and taking advantage of a company retirement
plan, such as a 401(k), will pay off in the long run.
much can you save?
It might encourage you to save if you figure out
how compound interest piles up. Our savings
calculator shows how much interest you can earn by starting early. For example,
if you begin saving $200 a month at age 21 in a vehicle that earns 6 percent interest,
by the time you are 65, you'll have $519,392.
That's great. But where is that
money for savings going to come from? We assembled
the following table to show where a lot of
money can be saved. If you save the $422 a
month shown in
the table, beginning at age 21, you'll
have $1,095,967 at retirement. If your savings
earn 8 percent, you'll have a whopping $2,064,061
at age 65.
should motivate you to get on the retirement savings track right away.
How to invest for retirement
Once you enroll in a retirement plan, you have to decide how to invest the money. Most companies' 401(k) plans offer many choices, and which funds you invest in depends on your age and risk tolerance.
"Someone in their 20s should
have exposure to the equity markets, both
foreign and domestic, even emerging markets,"
says Heller. "And they should be very
careful not to spread their money around in
so many funds that on the surface appear to
be different. They may think they are diversified
when actually the funds hold many of the same
Although saving for retirement
early is important, Heller has a caveat: He
says paying off certain debts, such as credit
card debt, is more important. "They should
only begin to save for retirement to the extent
that it doesn't compromise their financial
situation, such as running up credit card
debt," he says. "It's great to save
for retirement, but they have to focus on
their goals. Each goal has a different
time horizon, different degrees of necessity
and calls for an investment strategy designed
to meet that particular goal."