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Starting retirement planning early in career pays off later

As most recent college grads work toward getting their first jobs, local financial advisers say they should also consider saving for retirement.

Long-term financial planning might be the farthest thing from their minds, but it shouldn’t be. Although many grads are overwhelmed with student loan debt, advisers say the cost of waiting is high, especially as Social Security’s future viability is in question. By taking action early, they can save hundreds of thousands of dollars.

For instance, a 30-year-old who sets aside $550 per month can save up to $990,000 by age 65, while someone who waits until age 40 gains half that amount, according to investment firm Edward Jones.

Of course, these examples don’t include taxes, fees or commissions, but they do offer a rough example of an investment with a 7 percent annual return, according to the firm. The earlier graduates start investing the better because of compounding interest, said Morgan Almer, financial counselor at the Village Family Service Center in Fargo.  

“There’s no doubt that if you can start in your 20s, you’re way ahead of the game than someone who starts in their 40s,” he said.

Plans and goals

Grads should first develop a savings plan for reducing debt, start an emergency fund of up to six months of expenses and then devise a savings plan, said advisers.

The best target for retirement savings is between 10 and 15 percent of income, they said. To the average person — particularly students with crippling loan debt — this can be a significant amount of money, especially if also saving for vacations or new homes.

But contrary to popular belief, you don’t need a lot of money to invest, advisers said. Following the concept behind the “latte factor,” the idea that small, trivial expenses can snowball over time, the same can be said of investments — as little as $25 a month can add up, said Almer.

“Something is better than nothing,” he said.

What you want to save depends on the comfort level you want in retirement or if you want to rely on Social Security. That’s why long-term planning is so important, advisers said.

“What do you see yourself doing in retirement? How much of your current income are you going to need?” Almer said. “It’s a hard question to answer, but it’s one of the things you need to know to calculate how much you need to set aside.”

Options

One easy way for employed graduates to get started is by signing up a 401(k) plan, which typically has employers match contributions, they said.

Jay Panzer, financial adviser at Choice Financial, said a lot of people don’t sign up for a 401(k) because they don’t think they can afford it, but that’s a misconception.

“If they do it, they’ll never know it’s not there,” he said.

Another way to save is through an Individual Retirement Account, referred to as an IRA, that offers tax-free income in retirement and can be arranged through an investment firm or bank, he said.

Beginners can also invest in shares for a mutual fund, which is basically a “bucket” of professionally selected stocks or bonds. It’s also relatively inexpensive — if drawn regularly from a checking or savings account, it can mean as little as $50 a month, he said.

Mark Larsen, financial adviser at Edward Jones, said mutual funds are also beneficial because professional money managers research and monitor their performance. The diversity of stocks and bonds can be beneficial, too, he said.

“No single investment performs well under all conditions,” he said. “You just want to reduce risk.”

Larsen also noted investors should remember they can control how much they invest and be wary of fads. 

“Stay focused despite what is going on in the current news,” he said.

Consolidating student loans is also advised, as well as getting on an income-based repayment plan, said advisers. Lower payments for student loans means graduates can also set aside money for retirement.

Almer said he sees more graduates dealing with crippling loan debt than ones looking to save. Sometimes, the only option is a matter of increasing income or decreasing expenses, he said.

“That might mean picking up a part-time job with a few extra hours,” he said. 

Jennifer Johnson

Jennifer Johnson is the K-12 education reporter for The Grand Forks Herald.  Contact her if you have any story ideas or tips and visit www.grandforksherald.com. 

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