Congrats, Graduates! Now start saving for retirement
Summer vacation time is just around the corner. Planning ahead can keep your vacation from blowing your entire budget for the summer. Here are a few planning and budgeting tips that will keep your vacation relaxing and reduce the stress on your wallet at the same time!
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Nearly two million Americans will graduate from college with an undergraduate degree this year, and most of them will enter the workforce rather than continue on to a graduate degree. As these twenty-something's begin earning wages from "real jobs" for the first time, many overlook the need to start saving for retirement. However, saving early is more important than ever. With pension plans becoming increasingly rare and Americans living an average 22 years longer than they did when Social Security was created in 1937, todays youngest members of the workforce are largely responsible for their own retirement income.
Here's a quick overview of the most common investment accounts used to save for retirement:
IRA - If your employer doesn't offer a company retirement plan (or if you're currently under- or unemployed), start your own nest egg by opening an Individual Retirement Account (IRA). These accounts provide tax advantages that a regular savings account does not. The maximum contribution to an IRA is $5,500 per year if you're under age 50. The money in IRAs is invested by the company managing the account and it is also easier to withdraw from than a 401(k). However, there are still several fees and penalties associated with early withdrawal.
401(k) - This type of retirement savings account is directed by employers and contributions are deducted from paychecks, before taxes. The account is then taxed when a withdrawal is made. The current maximum annual contribution to a 401(k) plan is $18,000. Also, many employer plans include a matching contribution, which is money that the employer will contribute to the account in addition to the employee's contributions. For example, if the company you work for has a program where they will match 50 percent of your contribution up to 3 percent of your paycheck, if you contribute the full 3 percent, you'll receive an additional 1.5 percent from your employer. That's free money for your retirement!
Roth vs Traditional - There are two types of both IRAs and 401(k) plans, Roth and Traditional. The basic difference is when the contributor pays taxes on the account. With a traditional retirement account the taxes are paid when the money is withdrawn. With a Roth account the taxes are paid when the money is added to the account. Roth accounts are especially valuable to young workers, as they are more likely to climb into higher tax brackets as they age, meaning they would owe more in taxes on the same amount of money later in life.
Notice that keeping cash under your mattress isn't on this list. Money that isn't invested or placed in a bank account earns no returns or interest. Make your hard-earned money work for you by investing in an IRA or 401(k) or depositing it into an interest-earning savings account.
If you have questions about how to get started saving for your retirement, ask your employer's Human Resources personnel or talk to your local banker.