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How to plan for retirement?

Seeing as how my income will be very minimal while in college (around 200$ a month) how can I begin saving for my retirement? -- Also interested in investing
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Jeff’s Answer

Hi Joshua,

It is vitally important you invest as young as possible.  A company offers a vehicle called a 401k in which they match a % of your contributions (for example, 100% of 6% is typical) which is FREE MONEY.  If you haven't started working for a company yet, look into a RothIRA.  Money can be taken out in retirement TAX FREE!  This is such a great investment vehicle that the government (whose tax laws created it) only permit you to invest $5500 per year, and you can't go back in time and invest (the year you start you can invest $5500 and another $5500 the following year, but you can't go back and invest $5500 for age 21, 20, 19, etc.)  You can set one up at a financial institution like Fidelity, Charles Schwab, or Vanguard.  Don't do riskier investments like investing in a single stock, invest in the stock market as a whole cheaply such as with an ETF (Exchange Traded Fund) that tracks the market (QQQ is one that tracks tech companies, IVV tracks large US companies, VTSAX tracks the whole market- these are all good examples of what to put your money into inside the vehicles listed above). 

I would suggest getting a part time job while in college, and set one of these up.  In general terms, the market doubles on average every 7 years, meaning whatever you have invested will be twice as much in that time.  A 21 year old who invests in a Roth IRA will have a half million in 30 years.  A 401k will yield even more since you get the free money and can invest more.  Here is more info (https://www.nerdwallet.com/investing/roth-ira-calculator).

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David’s Answer

Hello Joshua,

There are different retirement vehicles and each have their pros and cons. Choosing which retirement vehicle depends on your expected marginal tax bracket during retirement. I typically recommend investing in all, including a taxable account (brokerage account), but how much in each varies. Often, your tax bracket may vary depending on your retirement income for a given year. Things to consider are what age you retire, any part-time employment income during retirement, when you take your social security benefits (up to 80% may be taxable), and retirement goals.

Traditional IRA/401(k) contributions are made with pre-tax dollars and are tax deductible, withdrawals are taxable.
Roth IRA contributions are made with after-tax dollars and are NOT tax deductible, withdrawals are tax-free.
Taxable accounts (brokerage accounts) are made with after-tax dollars and are NOT tax deductible, withdrawals are taxed only on the portion that was growth, if there is no growth in the account then that means the withdrawals are tax-free (return of principal).

In general, securities that are expected to grow slowly and that are income producing should be placed in a traditional IRA/401(k) account. Roth IRA’s should have securities that are expected to grow very quickly. Taxable accounts should have securities that are not expected to grow rapidly nor produce a lot of income.

Hope this helps and best of luck!

DSM
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Adam’s Answer

I agree, its never to early and the earlier the better to be honest. Even if the company you are making money with does not offer at 401k, anyone can invest in a IRA. Best bet is to do your research online and/or consult a investment advisor for the best situation for you. Each and every situation is unique.
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Paul’s Answer

It's never too early to start thinking about retirement! I would suggest you do some research to find a financial institution that will accept as little as $50 per month to invest for your retirement. Note that you may be required to set-up an automatic draft from a checking account. As far as the type of investment vehicle, many financial advisors suggest Roth IRAs as a great tool to save over the long-term. You will not get a tax deduction on your contributions but as long as you keep the assets in the account for at least 5-yrs the money will grow tax deferred and you are not subject to taxes upon withdrawal.


Please consult a tax advisor before you make any investment decisions.

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Chris’s Answer

All great answers. Another tidbit several people have found helpful is start with a certain percentage and have it auto increase 1% each year. So for example, if you start at 6% in 2021, then set the goal for 7% for 2022 and so on.
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Robert’s Answer

i started saving once i started working and i put in the company 401k match which was like 5%. I found out that contributing 5% did impact my take home money that much. I didn't have a lot of expenses out of college but did have car, apartment, loans. I sacrificed a few things i normally did in college to get a good start. 23 years later I am o glad to have done what I did. Once I was comfortable with my take home I added my raise each year into my contribution. Even if you can only do 1% it is a start.

Robert recommends the following next steps:

Track your income and expenses - set a budget
open an account and start small
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Tara’s Answer

Hi Joshua - While I agree with everyone else that you should start saving as early as possible, and definitely read up on 401K, Roth and traditional IRA savings accounts so you understand them, if your income is only $200 per month, and you are still in college, I would also like to remind you that it is okay to wait a little longer to start saving for retirement. College goes by in a flash, and there is so much to experience during that short time in your life so I think it's okay if you don't worry so much about retirement before you've even started working.

I would recommend putting aside as much money as you can in a regular savings account, and then using it to do something fun and adventurous before you inevitably take on the responsibility of a full time job after you graduate. Travel to places you haven't been, experience the world, meet new people, and make memories that will stay with you for the rest of your life! Although it won't help you with retirement, it is still a great investment. You are only young once, please enjoy it while you can!
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Karen A.’s Answer

Kudos to you for recognizing the importance of starting to save for retirement early. I also had a keen desire at a young age to start saving and investing early. I read a few books about financial sense, notably by Vanita Van Caspel. There are probably more current and relevant authors available now. But the one thing Vanita's books made clear to me was that no matter how much I brought home, I needed to PAY MYSELF FIRST. I decided to put 10% of every paycheck into a savings account. I did not invest right away because Vanita, as most financial advisors will do, stressed the importance of setting up a liquid emergency fund to cover the unexpected things that must be handled. It was actually about 8 years before I entered corporate America and had a 401K available to me, at which point I started investing as much as I needed to in order to get the maximum company match. After that, as many here have said, I tried to increase the amount I saved by 1% every year.

If you start when you are young and stick with it, you are likely to be quite satisfied with the results. The one other thing I would add is that once you have some assets and/or money to invest outside of your 401K, consult with a Certified Financial Planner who can help you map out your years and strategies until retirement. I hope this is helpful, and best wishes to you!
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