Preparing for retirement usually isn’t at the forefront of a college student’s mind, but if you’re attending college later in life, it’s important to start saving while you’re still in school. According to a 2014 study by Inceptia, 47 percent of nontraditional students ages 25 to 44 did not have a retirement plan. Of those students, 78 percent did not know how much they needed to save for retirement. If you want to start investing in your future while managing your everyday expenses as a student, here are a few items to get you started.
- The power of compound interest
When you invest in a retirement account, not only do you earn interest on your contribution, you also earn interest on the returns of that contribution. If you invest $200 a month for 30 years, your earnings will amount to nearly $160,000. Investing that same amount for 25 years will yield much less – just under $115,000. Understanding the time value of money is essential when it comes to any personal finance decision. In this case, waiting just five years to start saving for retirement meant a difference of $45,000.
- Invest in your employer’s 401(k)
If your employer offers a 401(k) plan, consider contributing a portion of your paycheck. Your 401(k) contributions are tax-deferred, meaning you don’t have to pay taxes on your account earnings until you withdraw funds. Your employer may even match your contributions up to 100 percent.
- Cut costs with an IRA
Sometimes employer-sponsored plans have higher fees than Individual Retirement Accounts or IRAs. If that’s the case, you have two additional savings options: a traditional IRA and a Roth IRA. Before you decide what option is right for you, it may be helpful to consider which account provides the most tax savings.
For a Roth IRA, you only pay taxes on your contributions. Because you contribute less than the total amount of your final earnings, this option helps you save on taxes when you retire. You’ll be able to withdraw your earnings both tax and worry-free. With a traditional IRA, your contributions are tax-free, lowering your taxable income. You will, however, be taxed on your withdrawals; as your earnings grow, so will your tax rate.
Talk to your accountant or financial adviser to determine what IRA option works best for your financial situation. They can show you how each IRA contribution will affect your current income as well as your income upon retirement.
- Wait on withdrawal
As you start to save in earnest, it can be exciting to watch your retirement nest egg grow. But be sure to keep retirement money where it belongs – in its account until the day you retire. Resist the urge to use retirement funds for emergencies or to cover the cost of a major expense, like a new car. Not only could it jeopardize your future, withdrawing money before the age of 59.5 generally results in a 10 percent penalty tax.