IF YOU’RE in college right now, saving for retirement probably isn’t even a blip on your radar screen. Yet this is the time in your life when every dollar squirreled away will reap the most bang. Raising your eyebrows in disbelief at the thought of saving for retirement, while in the midst of struggling to cover tuition? My two children are in college and currently making money from summer internships. Here are the five things I tell them:
1. The most important reason to start isn’t what you think. Sure, the financial gains could be astonishing. The main reason to begin now, however, is to start a life-long habit—one that’ll help you reach your dreams far faster.
Look at the happiest, most fulfilled, purpose-driven people you know. There’s a high probability that they know the value of delaying a bit of gratification today to enjoy a more meaningful life later. By structuring your life during college so that you sock away a modest amount monthly, you will greatly increase the odds of achieving your aspirations, including new ones that will emerge in the years ahead.
2. You can’t beat the compounding. Because of the time stretching ahead of you, you have a luxury that your parents’ generation envies. A college sophomore who invests a $1,000 in a Roth IRA and parks it there, without adding another penny, will have more than $9,400 by age 65, while someone who waits until 45 will have around $2,650, assuming 5% compound interest. To see this for yourself, try the Securities and Exchange Commission’s online calculator.
3. There’s a hidden benefit you can’t appreciate yet. By saving now for retirement, you insulate yourself against rough times. The optimism of your age group is uplifting, but it may cloud your appreciation of this. By regularly setting aside a small part of your income now, you will greatly soften the blow when times get seriously—and sometimes frighteningly—lean. Once ingrained, living beneath your means will set you apart from your peers and be a lynchpin in your life happiness.
4. It’s cheaper than you think to get started. For $50 a month in automatic contributions, you can get things rolling. To begin, set up automatic monthly contributions into a separate savings account at your hometown bank or credit union. Once you have $500 in hand, establish a Roth IRA at your bank. When your stockpile reaches $1,000, you’ll have enough to open an account at many mutual fund companies. Transfer your $1,000 to a low-cost stock index fund in a Roth IRA at a respected company and continue your monthly automatic contributions.
I trust Vanguard Group the most because of its founding principles, long-term performance, extraordinarily low fees, and the wonderful mix of U.S., foreign, large and small-company stocks in its target-date retirement index funds. Other respected companies include Fidelity Investments and Charles Schwab.
5. What if you have big plans ahead? Thinking you might need cash someday to start your own business? Or for a down payment on a home? Or to take a year off to travel the world? Keeping your savings accessible is a valid concern—one I hear in my own household.
This, however, is yet another reason to fund a Roth IRA. Any money you stick in a Roth IRA is available to you at any time. You can’t take out your investment gains without triggering taxes and penalties, but you can withdraw your contributions whenever you want. My guess: Thanks to the good habits you’ve learned, you’ll set up a separate savings program for your other plans—and you won’t rob your Roth.
Ultimately, this isn’t just about retirement savings. It’s about a strategy for a better life. Start this month—and you’ll set yourself on a path that’ll put you far ahead of your fellow classmates.
Amy Charlene Reed is a science and energy writer who lives near Oak Ridge, Tenn. Her previous blog was Baby Steps.