Editor's note: This is the first in a weeklong series of stories forecasting the future and providing tips for soon-to-be college graduates.
College graduates taking their first steps in the real work world often have a paycheck-to-paycheck mindset, but financial experts say young employees should be thinking much further into the future and even toward retirement.
Graduates entering the job market now face a gloomy economic picture when it comes to the recent history of saving in the United States. Government figures put the national saving rate at negative 0.5 percent for 2005, its lowest annual number since the Great Depression era.
Experts estimate that retirees will need at least 70 percent of their pre-retirement income to maintain their standards of living, but in 2004, only 42 percent of Americans had calculated the amount they would need to save for retirement, according to the U.S. Department of Labor. For 2005, 60 percent of workers had access to some kind of retirement benefits, but only 50 percent of those utilized their options, the department reported.
One of the easiest ways for graduates to challenge that bleak outlook on savings as they enter the career world is to take advantage of retirement savings plans offered by their employers, especially the 401(k) plan.
Through a 401(k) ' which gets its name from where it is described in the Internal Revenue Code ' workers contribute a certain percentage of their paychecks to the fund, and employers often match a small percentage. The money is then invested until the employee retires, and in most cases, the employee chooses how to invest his savings.
In terms of 401(k)
there really isn't any better way to begin investing out there. It really is free money said Todd Romer, founder and director of Young Money magazine and www.youngmoney.com, which offer financial information and features for college students and graduates.
Like Romer, finance experts often refer to 401(k) plans as producing free money because the plans are commonly offered for full-time employees, and employers often will match at least a small percent of the money deposited into the investment fund. As a rule of thumb, many experts recommend depositing at least the amount the employer will match.
Romer's Web site offers visitors an easy savings calculator to determine how much they could save using a 401(k) given certain variables. For example, a 23-year-old employee with a pretax annual income of $26,000 could deposit the maximum match amount ' say, 5 percent of his $500 weekly paycheck, or $25. In a year, the employee will deposit $1,040, and assuming the employer matches half that amount, the employee's savings from that year will total more than $1,500, not including interest.
The traditional 401(k) plan is tax deferred, meaning the employee pays taxes on the money as he withdraws it during retirement. With newer types of 401(k) plans, the employee pays taxes on the money when it is earned.
If the aforementioned employee remains at the same job and salary until he is 65 and earns a 7.5 percent rate of return on deposits into his savings plan, he will have more than $536,000 saved by age 65.
Romer acknowledged that recent graduates often think little about retirement and worry more about affording other things, such as college loans and living expenses. But he added, You can't really not afford to at least begin putting a small percentage of your income into a 401(k).
Experts also emphasize the need to start saving early. The sooner you start the better off you're going to be when you retire
said Connie Esmond-Kiger, an associate professor of accountancy at Ohio University.
Saving will be especially important for the children and grandchildren of the baby boomer generation, including many current college students, because their financial retirement needs could be as high as several million dollars, she said.
And the recent history of American savings trends has not been positive. Government figures put the national saving rate at 1.4 percent in 2004 and 1.7 percent for the first half of 2005.
No matter how much or how little an employee puts into a savings plan, the key to such plans being beneficial in the future is letting the money accumulate until retirement. It should be considered money for later on
not for your immediate gratification
said John MacDonald, a spokesman for the Employee Benefit Research Institute and its American Savings Education Council, which promote education about retirement saving and employee benefit programs.
Especially when they switch jobs, some young employees have to fight an urge to withdraw some of the money before retirement, often at a very high cost. Instead, employees should look for ways to reinvest the money in the new employer's plan or in another savings plan, MacDonald said.
As they progress in their careers, employees also might consider developing an individual retirement account, or IRA. Unlike the 401(k) plan, IRAs take more employee initiative to establish, and the contributions are limited, sometimes not tax deferred and not typically matched, MacDonald said.
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