New Grads Have a Huge Retirement Savings Advantage

Investing, Retirement Planning
New Grads Have a Huge Retirement Savings Advantage

Commencement is over and pictures of airborne mortarboards have been posted. If you’re a new grad, it’s on to the next selfie moment — you at your first post-college gig peeling $200 off the top of your paycheck and tucking it away for your future retired self.

Four decades from now, when you’re waving around a solid gold selfie stick at your lavish retirement bash, you’ll look fondly at that old snapshot and thank your baby-faced self 400,289 times over, because that’s how many dollars you’ll have if you continue to save $200 a month until retirement and earn an average annual return of 6%.

Those results are thanks to time (which you’ve got plenty of) and compound interest.

It’s all uphill from here

Compound interest starts to work its magic the moment your initial $200 investment — your principal — starts to earn interest. After that, the gradually swelling account balance (of continued principal contributions plus interest) earns ever-greater sums of compounding interest and eventually blossoms into the mother of all pay days.

But remember, there’s a second part to the $400,289 future payday: Time. And the sooner you get started saving, the better.

Ask anyone who is more than 15 years older than you for their biggest financial regrets, and chances are really good you’ll hear, “I wish I had started saving sooner” (as well as, “I regret all that credit card spending — mostly the perms and jorts” and “If only I’d bought shares of Apple back in the day”).

You don’t have to be a mathlete to see why people regret not getting wise to saving when they were your age: A few minutes tinkering with a compound interest calculator illustrates the point quite clearly.

Kids these days have it made

Your elders might harbor a mild subconscious jealousy about your situation for reasons other than time. You’ve got a lot more going for you than you might think, including:

A low starting salary: In a certain context, being undercompensated has its perks. After all, your paycheck can only go up from here, right? Saving $50, $100 or even $200 a month (like our earlier scenario) may be difficult at the beginning of your post-college working life, but soon you’ll start getting employee-of-the month plaques and raises and be able to afford to save even more.

Time to avoid (or recover from) investing indiscretions: While recent grads are fortunate to have decades to save for retirement, time can also work against their future financial well-being. Decades of exposure to avoidable investment fees — from brokerage commissions to sales loads — can silently siphon hundreds of thousands of dollars from a portfolio. A recent study of the effect of investment fees found that a 0.93% cost difference can cost an investor more than $200,000 in fees over the 40-year period that roughly spans the time between now and when millennials will be ready to retire.

Access to cheaper investments: In the past 15 years, the number of automated market-indexed mutual funds and exchange-traded funds, and automatically balanced target-date retirement funds has multiplied like Tribbles on an episode of “Star Trek.” That’s good news for new investors: Because they cost less to run than actively managed mutual funds (run by handsomely paid money managers), more of your savings is left to compound.

An army of low-cost robot money managers on call: Need guidance or a second opinion on how much to save for what and where to put it? Professional portfolio management — once the realm of only the wealthy — is just a click away. Thanks to technology, everyday people can get affordable savings and investing advice and ongoing asset management via robo-advisors, companies that use sophisticated software to manage clients’ money.

A retirement savings roadmap: No need for last-minute cramming for “Saving for Retirement 101.” This one’s an open-book assignment:

  • Automate everything starting with that first paycheck. Set up automatic transfers from your checking account (or paycheck) into your retirement savings accounts.
  • Grab any employer match in a 401(k). If your employer offers a retirement plan that includes an employer match, contribute whatever amount gets you the maximum match. Bonus perk: Your contributions lower your taxable income for the year.
  • Set up a Roth IRA, which gives you features and flexibility not available in your workplace retirement plan or a traditional IRA. Another reason new grads should favor a Roth: You’re likely in a lower tax bracket right now than you’ll be in retirement. Because Roth withdrawals aren’t taxed after age 59½, your future tax savings will be greater.
  • Revisit your 401(k) or move on to a traditional IRA. If your workplace retirement plan offers only crummy, high-fee investment choices and you can only make partial (or no) Roth IRA contributions, direct your next investing dollars into a traditional IRA. You’ll be able to choose from a wider variety of investments and, depending on your income and other eligibility factors, get the same tax deferral benefit you get from a 401(k).

Dayana Yochim is a staff writer at NerdWallet, a personal finance website: Email: dyochim@nerdwallet.com. Twitter: @DayanaYochim.

This article was written by NerdWallet and was originally published by USA Today.