For many college students, especially those who just completed high school, retirement may seem a long way off.
But experts like Susan Speirs, CEO of the Utah Association of Certified Public Accountants, believe now is the time to start saving. Spiers said young people often don’t start thinking about retirement until years after they’ve earned a college degree, and that this could leave them scrambling to catch up on savings when they reach older-adult age.
“They’ve got to put their money to work for them,” Speirs said.
A calculator on the Forbes Advisor website shows the compounding years of interest from contributions made at varying ages. Saving $100 per month starting at age 25 will net $393,714 by age 65, compared to only $59,214 if waiting until age 50 to start saving the same amount.
Ryan Whitby, associate professor of finance in the Department of Economics and Finance at the Jon M. Huntsman School of Business at Utah State University, said paying attention to compounded interest is crucial when getting started.
“[Compounding interest] works for you day and night and doesn’t get tired,” he said. “Combine it with a long horizon, and a high interest rate, and it can be really astounding. You can’t always rely on a high interest rate, [and] that is why it is so important to start early and be consistent.”
When calculating a retirement balance, Whitby added, time is crucial.
“The future value of saving $200 a month over 20 years versus 40 years can be somewhat shocking when students first see the example,” he said. “Similar to your calculation, if you use 10% at 20 years, it is about $152,000. If you extend it to 40 years, it turns into $1.26 million. The one thing you can’t get back is time, so starting early is maybe the most important part of the process.”
Salt Lake Community College student Westin Price, a 20-year-old business major, said he wants to be prepared for retirement and contributes every year.
“I would like to be prepared for retirement now. It’s not one of my biggest focuses but it is something I’m not ignoring,” Price said, adding that he hopes to increase the contribution as he earns more.
A gradual increase of savings is a strategy that Michael Wilson, a retirement planning supervisor at Utah Retirement Systems, recommends. Wilson suggests putting away 1% of any raises or promotions that are received. A typical cost-of-living increase, for example, can raise a salary by 3%. This leaves 2% of the raise in the paycheck.
“That 1%, [you] never saw it, because you put it away,” he said. “You never felt it.”
Budgeting
Contributing now, Speirs noted, will make the retirement years brighter. Instilling the habit of setting money aside for the future not only serves as solid discipline, but it will free the saver of anxiety and stress in the future, experts say.
According to a 2017 study by Katharine N. Widener from Southeastern University, a lack of understanding on how to manage money can lead to unhealthy financial behaviors, which makes not planning for retirement and ending up struggling financially in the senior years more likely.
A budget, says the Consumer Finance Protection Bureau, will pull income and expenses together so there is an accurate and effective financial plan in place.
“We budget for our rent, our groceries, for tuition. We [also have] to budget for retirement, because at some time we’re, hopefully, going to be in a place where we don’t have to work,” Speirs said.
She added that the creation of a plan makes being disciplined about saving easier.
“We don’t want [students] working at retirement age. It’s taking care of the future now at smaller increments,” she said. “If you’re saving a couple hundred a month, you’ve got that time for it to grow.”
SLCC student Julius Manzi, a 19-year-old pre-med major, said he tries to balance saving and spending. “Sometimes I stay at home in order to not spend,” he said, and may instead opt for a more budget-friendly weekend.
Retirement saving options: 401k and IRA
The first savings option is the 401k, a retirement savings plan offered by many employers in the private sector that allows employees to participate in contributing pre-taxed earnings.
If an employee’s income is $30,000, for example, and they contribute $3,000 to their 401k account, they will pay tax on only $27,000. Once retired, withdrawals, which are taxed, can be done as early as 59 and a half years old. Some employers will match dollars contributed up to a certain percentage.
“Whatever the amount is to get the match, that’s what you need to put in,” Speirs said. “Otherwise, you are leaving money on the table. That is free money.”
A second option is the Individual Retirement Account, or IRA, which allows an individual to save for retirement with tax-free growth through a personal savings account. Both Price and Manzi started an IRA at 18.
Wilson suggested students also look to the Saver’s Credit, a credit on the tax return offered to part-time students who are at least 18, not claimed as a dependent, in a lower income bracket and contribute to an IRA.
“The earnings [income bracket] limit isn’t super high,” Wilson said about the Saver’s Credit. “The IRS is going to give a tax credit to put money into a retirement account.”
Social Security
Social Security, a federal program that issues retirement and disability benefits to qualified people, will pay an estimated 77% of benefits in 2034, according to a 2022 Social Security trustee report, and only 72% by 2096.
“You need to be in control of your retirement. Don’t depend on the government for that,” Speirs said, noting Social Security isn’t a guarantee. “I know we’ll get something, but it’s tough to speculate on.”
Experts also suggest younger savers prepare for emergencies by creating a fund that will help avoid having to dip into retirement funds.
“An emergency fund is a good idea for everyone,” Whitby said. “My guess is that 25- and 30-year-olds have just as many emergencies as anyone else.”
He advises creating a “rainy-day” fund that can cover a few months of pay.
“It doesn’t have to be large,” he said, “but not having one will be more stressful – and cause more problems in the long run.”
