Finishing college is a huge milestone, and one that’s surrounded by many other important accomplishments. Your first “grown-up” job, your first student loan payment, and your first time getting health insurance usually follows graduation, but with so much going on, it’s easy to forget about another important occasion: saving for retirement. If you’re a new graduate starting a job, make sure to follow these steps to as you learn how to save money for retirement.
Get your 401(k) employer match
A 401(k) account (or a 403(b) for higher education employees) is the first account most of us are exposed to when we start saving for retirement. A 401(k) is a retirement plan where you do not pay any income taxes on dollars contributed, and instead delay paying taxes until you withdraw from the account during your retirement.
Many large employers offer a 401(k) matching program, where your employer will contribute a matching percentage of your paycheck when you contribute to your 401(k) account. Right now, most employer matches are up to 3 to 6 percent of your salary.
Some employers match 100 percent of every dollar you contribute to that limit, and others match 50 percent up to a limit. For example, if you make $40,000 per year and can get a 100 percent match of the first 4 percent of your salary, you can get $1,600 free from your employer if you also contribute $1,600 to your retirement account. If you get a 50 percent match on up to 6 percent of your income at $40,000 per year, you would have to contribute $2,400 per year to get the full 3 percent, or $1,200, from your employer.
Remember, this isn’t money you are spending—it’s saving for your future. After you retire, you get every dollar back plus the investment gains. Unless it would cause you to miss loan payments or become hungry and homeless, always take full advantage of any employer match. It’s one of the best ways to save for retirement, and if you don’t use it you’re leaving free money on the table.
Set up automated Roth IRA investments
Once you take full advantage of your employer match, the next best place to put your money is a Roth IRA. A Roth IRA is another tax-advantaged account, but instead of paying taxes during your retirement, you pay taxes on the money you put in and can withdraw it tax-free when you buy your first home or retire. The current maximum you can contribute to a Roth IRA is $5,500 per year if you are under 50 years old (as of 2016).
Once your student loans and other bills are covered, putting any extra income you can into a Roth IRA is a huge investment in your future. If you are paid twice a month, you can put $211 from each paycheck into your Roth IRA automatically as part of a split direct deposit to reach the maximum each year without having to think about it.
Once the funds are in your Roth IRA (or most other retirement accounts), you can invest them any way you choose. My favorite investments for new graduates are a low-fee S&P 500 index fund or a low-fee target date fund. What you invest in, however, is ultimately your decision. If you’re not sure how to start a retirement fund, contact your brokerage (the place you opened your Roth IRA) for ideas and information on automatically investing the cash in your account.
Don’t forget, if you have a lot of debt, this step and the steps below are optional. Never miss a minimum payment. However, making an effort to balance extra loan payments with retirement contributions can help you get out of debt while still saving for the future.
Add an annual 401(k) step up
Once you max out your Roth IRA, the next best place to stash away money for retirement is your 401(k). You are already taking full advantage of your employer match, but you can put up to $18,000 per year in your 401(k) as of 2016.
You can do this by increasing the percentage invested from each paycheck. Once you have set that to a number you’re comfortable with, some 401(k) providers allow you to put in an automatic increase annually. Many people get at least a small raise at the start of each year, so that is the perfect time to have your 401(k) contribution increase by 1 percent.
Make your own retirement snowball
If you are reaching the maximum contribution on your Roth IRA and 401(k), consider yourself a pro at planning for retirement! If you earn enough to cover your expenses and you still have more to invest, the last place to stash away money is a regular taxable investment account.
Your Roth IRA and 401(k) have clear tax advantages, but you cannot access that money without paying fees until you reach 59 and a half years old (this may be the first time it mattered that you were half a year older since you turned 10). When saving for retirement, a taxable investment account does not have the same advantages as an IRA or 401(k), but you can access the funds at any time, including circumstances like purchasing a home, paying off your student loans early, or even taking an early retirement.
When saving for retirement, leave things alone
Once your accounts are set up and you have automated investments, it’s tempting to watch the balances change every day and tinker with your investment allocation. Don’t do it! The best thing you can do is leave your funds in something boring like the previously mentioned S&P 500 index funds or target date funds. It’s almost impossible to time the market and win, so leave things alone.
When planning for retirement, the right combination of accounts and investments is the key to success. If you follow these steps, your future self will thank you.
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1 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 3.89% APR (with Auto Pay) to 5.87% APR (with Auto Pay). Variable rate loan rates range from 2.47% APR (with Auto Pay) to 5.87% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of Month/Day/Year, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 08/21/18. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at firstname.lastname@example.org, or call 888-601-2801 for more information on ourstudent loan refinance product.
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2 Important Disclosures for Laurel Road.
Laurel Road Disclosures
3 Important Disclosures for SoFi.
4 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
5 Important Disclosures for CommonBond.
6 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
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