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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