It might seem far in the future, but you have to start thinking about retirement on the first day of your first job—and by “job” that means any money you earn at any point in your life.
From the time you start babysitting or mowing lawns to the orientation at the first workplace of your adult life, you need to make decisions about how much you will save for that far-off date when you stop working and how you will make the money grow over time.
MarketWatch recently spoke to a group of college students for the Barron’s Investing in Education program about how to start saving for retirement and they wanted to know about everything from investing mechanics to macroeconomic forces like inflation that will affect their long-term savings.
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Here’s the answers to the top questions they asked.
If you want to create your own savings investment account, where would you even start? Like what funds with low costs, and what indexes?
When you start earning money, there’s a hierarchy to follow that makes it easier to prioritize how to save a portion of it for later, and you should keep looking out as far into the future as possible.
- If you have access to a 401(k) at your job, contribute up to the 401(k) match—this is free money, so before opening a savings or investing account, start there.
- Put money aside for emergencies in an interest-bearing savings account. Get the highest rate on the market available, and move your money if a better deal comes along.
- Contribute to a Roth IRA—you can deposit up to $6,500 in earned income in 2023. You can do it even if you just have a few side gigs or a summer job, and even if you’re not yet 18 (with a parent’s help).
- Open an investing account and start as broad as possible, with a simple index fund, and then delve more deeply as you educate yourself on how to invest (hopefully, from sources other than social media).
What should be the expected return annualized?
Your guess is as good as anyone’s on this question. Past performance is not an indicator of future performance—that’s something you’ll hear a lot when it comes to investing. The last three years have been volatile and most expectations have been turned on their head. You can follow the S&P 500 index
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every day as a proxy of how things are going, but that still won’t tell you what will happen tomorrow.
That said, what has been true in the past is that, generally, stock markets have gone up over time, and if you invest when you’re young, you have a good chance of pulling ahead of inflation. You want a probability of success when you game out the numbers for 40 or 50 years from now using a retirement calculator, so you can use a number like 7% annualized average returns and play around with it from there.
But if you want a sure thing right now, you can get nearly 4% for now in a high-yield savings account, all the way up to 6.89% for Series I bonds, with CDs and short-term Treasurys
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falling in between.
What is the split of stocks vs. bonds?
There are all sorts of rules of thumb about how to split your investments based on factors like your age and overall income. You could pick one at random—like 100 minus your age to set your stock percentage—or you could be a bit more scientific about it and take a proper risk tolerance questionnaire. Whatever financial institution you choose for your investing should have a proprietary version of one, but you can also find free ones.
What area of a stock do you monitor the most to determine whether it’s a good investment?
The textbooks will tell you to evaluate a stock by looking at a bunch of mathematical ratios—like price-to-earnings or dividend yield—but before you delve into that look at this number: the expense ratio. Since most brokerages no longer charge for trades, this is basically the price you’re going to pay to own the investment. Any fees you pay eat away at your earnings, so you want to pick investments that offer a good return over the cost of ownership. Exchange-traded funds, which are baskets of stocks managed by a professional, are usually a good choice for this reason.
What is the penalty if I want to use money from a 401(k) before retirement?
If you take money out of a tax-deferred retirement account before you reach 59 ½, you’re going to owe income tax on the amount you withdraw, plus a 10% penalty unless you qualify for special hardship withdrawal exemption (which is hard to get).
A less costly way to access the funds is to take a 401(k) loan, if your plan allows it (and most do). You can take out 50% of the vested balance or up to $50,000, whichever is less. Technically, you’re borrowing from yourself and paying yourself back with interest. It’s not free, though. Your administrator will probably charge a yearly fee along the lines of $50, plus you will lose out on the growth that money would have made if it were still in the account. Also, most people stop contributing while they are paying back a loan, so you lose out on that, too. The big risk is if you leave the job before the loan is paid back, in which case you would owe the money back immediately or face income tax and the 10% penalty.
These strict rules are there for good reason, which is that the money you save for retirement is meant to be there for you when you stop working. Once you get started investing, the last thing you want is to get derailed along the way, so keep at it.
Got a question about the mechanics of investing, how it fits into your overall financial plan and what strategies can help you make the most out of your money? You can write me at beth.pinsker@marketwatch.com.
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