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I Just Graduated and I’m Saving for Retirement?!?

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The recent financial crisis has made US consumers increasingly nervous about the adequacy of their retirement savings. Perhaps one of the hardest hit groups is fresh graduates. Unemployment rates for 25-29 year olds in 2011 was 10.3%, well above the national average of 7.9% for those aged 25-54.

College graduates face many challenges. An unstable economy, gloomy job market prospects, and often, significant student debt. With so many things to worry about, retirement savings are often the last thing on their minds. It falls into the dangerous category of important, yet non-urgent. These are the things that sneak up on you, because suddenly, when you’re 45, they become urgent. At that point, you’ve lost ~20+ years when you could have been saving, and didn’t.

So don’t let this happen to you. Take stock of everything you need to do in the next day, week, month, year. Sort into the urgent/important matrix. Definitely tackle the Urgent & Important. But make concrete actions for the Important and non-urgent. Like saving for your retirement.

But how, you ask?

  1. Determine the “must-dos” of your budget. Rent, Debt repayment, Health insurance
  2. Look at what you spend on daily needs which have discretion built in (food, drinks, entertainment, transport)
  3. Carve out a portion of what’s left, and have that automatically deducted from your paycheck, and deposited into an account that is separate from what you normally use for daily expenses. You can find the highest interest-bearing deposits with NerdWallet’s handy deposits tool. Preferably, you’d put it into a Roth IRA. If you make less than $125K, you are eligible to put up to $5,000 in this tax-advantaged vehicle.

Savings horizon vs. rate of return

At the end of the day, there are two key determinants of your retirement savings.

  1. Savings rate – how much did you save, and for how long?
  2. Rate of return – what return did you earn on your savings

You have total control over how much you save, and when you start saving. Your rate of return is much more volatile and though you can mitigate downside risk through conservative portfolio allocation decisions, you can’t crank up your potential returns without a commensurate increase in risk – which means if you leave saving until your 40s, any attempt to increase the rate of return will result in a comparable increase in risk to your original capital, the very capital you are trying to grow and preserve in order to fund your retirement.