When you're just starting out in the workforce, retirement seems like a million years away. Besides, you likely have student loans to pay off and maybe a car loan. And odds are, you aren't making a great salary in your first job, if you've even got a job following graduation.
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Still, compounding is your ally in retirement savings, so the earlier you start saving, the better. When you begin retirement planning in your 20s and 30s, those dollars have years to grow and are potentially much more valuable than dollars you save in your 50s and 60s -- though any savings helps.
It's important to establish good savings habits when you're young, even though you're likely on a tight budget, says Joe Jennings, investment director for PNC Wealth Management in Baltimore.
1. Budget Carefully When Looking For Work
It's not really possible to start a retirement savings fund when you're going out on interviews and looking for a job. But there are ways to cultivate a low-spending mindset to prepare for saving for retirement once you do get a job.
"Living with your parents while you look for a job, and even after you get one, can help you save money, more than if you were living on your own," says John Corn, CPA, a financial planner with Buckingham Asset Management in St. Louis. You can save up for a deposit on an apartment or begin to accumulate an emergency fund to see you through unexpected expenses like car repairs.
Even if living with your parents isn't an option, you can minimize your expenses by living with roommates, deferring any student loan payments for as long as possible and choosing inexpensive entertainment options.
2. New Jobs Bring Income, More Expenses
Once you've landed your first job, you may need to move, buy some new clothes for work and reorganize your finances. One key aspect of moving into this new phase of life is budgeting, Corn says.
"Every young person needs a budget," he says. "You need to understand what's coming in, net of taxes each month, and what's going out to pay your benefits. Then you have rent, utilities and all the other expenses, like student loan payments."
You can use free budget software at websites such as Mint.com to help you track your income and expenses and set goals. "Your first expense should be to pay yourself, especially to establish an emergency fund in case you lose your job," he says. "You can also save for short- or intermediate-term goals like a new car."
Retirement planning should also be a priority.
3. Invest in Company Retirement Plan
When you start your new job, you'll be given materials about your company's retirement plan, if it offers one. Most companies offer a 401(k) or 403(b) plan where you contribute a percentage of your earnings and, in many cases, the company matches a percentage of those earnings.
"Make sure you aren't just investing your money, that you are also investing your time," Jennings says. "Do some research on your investing options. If there is a match to the 401(k) plan, you want to invest enough so that you get the company match. It's free money; don't leave that on the table."
4. Family Life Brings Financial Opportunities, Challenges
When you get married, you need to reach some common ground with your new spouse about saving and spending. With more income, you have the opportunity to save more for retirement by contributing to two retirement plans.
You also need to know what financial issues and baggage you and your spouse may bring into the marriage. "You want to understand what that person's credit history has been like and what their credit score is," says Corn. "You want to get a picture of what each of your assets and debts are, too, so you know where you stand in terms of your ability as a couple to buy a new car or a house."
As your family grows with the addition of a child or two, the challenges increase. You need to balance the need to continue to save for retirement with establishing and building a college fund. No matter how important it is for you to help your child out with college, don't skimp on your retirement savings. You can't borrow to pay for your retirement, but your child can borrow to pay for college.
5. Boost Savings as Earnings Increase
As you move up the career ladder, it's important to continue to boost your retirement savings with your salary increases. "If you've maxed out your 401(k) plan, you can contribute to a Roth IRA or open a brokerage account and dollar cost average into a diversified mutual fund with $100 a month," Corn says.
And don't ignore that emergency fund. As your family grows and your expenses increase, you'll need to keep adding to your emergency fund. "Generally, we recommend that you keep six months of living expenses in an emergency fund, but with unemployment still pretty high, it makes sense to save from nine months to a year's (worth) of expenses," says Jennings.