As terrible as this sounds, most young professionals aren’t thinking of investing and retirement planning post-college. When you land that first job, they whisk you away to human resources – and you probably selected a few things, but can’t remember what. Yes, some money comes out of your paycheck each month for some 401(k) or 403(b) plan… maybe. So today we have a guest post from NerdWallet to provide you with 3 Tips on Investing and Retirement Planning Post-College – cause it’s important.
You’ve only been off campus a few months or years, but every month you don’t save for retirement could mean additional time you’ll have to work later in life.
Don’t worry, saving for retirement doesn’t have to be painful. True, it’s money you could spend elsewhere now, but by investing in your 20s, you’re getting a major head start.
Start by using a retirement calculator to give you an idea of how much you should be saving each month. A good calculator will not only ask your age, income and current savings rate, but also let you adjust for your goals and how much you’ll need once you leave the workforce.
Once you have an idea of your savings goal, you can think about where to put it.
1. Take advantage of your 401(k) or consider a Roth IRA
Whether you’re in your first job or you’ve been in the workforce for years, you should be maximizing your 401(k) contributions. Your 401(k) is a retirement account funded directly from your paycheck, before taxes. The best part of contributing to this tax-advantaged account: Your employer will likely match your contributions up to a certain percent — yes, free money.
At least a portion of what you’re setting aside each month for retirement should go into your 401(k) if your employer offers one. Contribute at least as much as your employer will match. In other words, if your employer matches half of up to 4% of your income, contribute 4% at minimum.
If you don’t have access to a 401(k) or want to invest more than the maximum allowed, consider a regular individual retirement account or a Roth IRA. You can use an online broker to manage this account, and you’ll likely find you have greater investment choices with an IRA than your 401(k).
Those with six-figure incomes may face different contribution limits for Roth IRAs, but one perk they have over a 401(k) or traditional IRA is you won’t pay federal taxes on the money when you take it out at retirement. It’s taxed now, but keep in mind you may now be in a lower tax bracket than when you retire. Plus, the money grows tax-free and goes to work for you, compounded all those years until you retire.
2. Keep investment expenses low
Whether you’re using a 401(k), Roth IRA or both, you’ll need to choose where your investments are going. Nearly all investments have fees and expenses. Index funds or exchange-traded funds, also called ETFs, are a popular and inexpensive choice for new investors who want a simple way to build their portfolios. They’re generally cheaper than other types of funds, and because they’re essentially a collection of different investments, they’re an easy way to diversify.
Look for index funds and ETFs for your 401(k) with the lowest expenses. You can also use an online broker to invest in ETFs. Some offer commission-free ETFs and no minimum account balance, making them a good choice to keep costs low when your nest egg is small. To get you started, here are NerdWallet’s top picks of online brokers for ETF investing.
3. Revisit your strategy often
A new job or your first big promotion is cause for celebration, but then it’s time to think about how you’ll put your new earnings to work. Try to direct extra income like raises and bonuses into your investments.
Also consider putting any increases in income toward your student loans if you have them. After you’ve established a retirement savings account (or two), putting additional money toward paying off your debt will save you interest in the long run.
If you don’t carry debt, pat yourself on the back and revisit the retirement calculator when your income increases to see how you can adjust your strategy and possibly reach your retirement goals more quickly.
Elizabeth Renter is a staff writer at NerdWallet, a personal finance website. Email: firstname.lastname@example.org. Twitter: @ElizabethRenter.