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College Financing and Career Guide 2007
Getting started in life
There will be a lot of firsts now. See how getting off to a sound start will pay dividends for a lifetime.
Getting started in life
Saving for retirement early pays big dividends

The 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).

Regardless 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.

How 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.

That 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 stocks."

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."

-- Posted: July 2, 2007
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