Written by: Grant Wilburn
Coming out of college, every new grad is excited to get into their chosen field and start earning money. For many, this initial excitement is quickly accompanied by a new thought: “When can I retire?”
While not everyone has the same answer to this question, most will take similar steps to get there. In this blog, I’ll run through a few ways young professionals can start taking steps toward long-term financial success, and yes – maybe even early retirement. Since there are only two things anyone can do with their money, we’ll look at both categories: saving and spending.
It’s likely no surprise that it’s a good idea to start saving for retirement as early as possible, but since that’s not always as easy as it sounds, you’ll find budgeting advice in the “Spending” section below.
There are a few main ways we recommend that our clients save for retirement. Luckily, my colleagues here at Agili have already written some great blog posts on all of them:
Employer Retirement Plans
- Dan Honsberger writes about maximizing your 401k plan in his article, Habits of a 401k Millionaire.
- In 2020, employees can contribute up to $19,500 to their 401k, 403b, or 457 plan (and this doesn’t include the employer match!). The catch-up contribution for those over 50 is $6,500, for a total of $26,000 in possible savings.
Traditional and Roth IRAs
- For those with extra money to put toward retirement, Sarah Caine shares the differences between the two and their best uses in her post, When Should I Choose a Roth IRA over a Traditional IRA?
- The 2020 contribution limits for both Roth and Traditional IRAs is $6,000, with a catch-up limit of $1,000.
Health Savings Accounts (HSAs)
- If you’re covered by a high-deductible health plan, contributing to an HSA is a great way to save for retirement. In fact, it’s the only account you’ll find that is triple tax-advantaged! Jen Pieson and Marilee Falco both go in-depth on HSAs in their articles, HSAs and HSAs are the Picture of Future Health and Long-Term Care.
- 2020 HSA contribution limits are $3,550 for those with single health coverage and $7,100 for those with a family plan. The catch-up contribution for those that are 55 and older is $1,000.
Taxable Brokerage Accounts
- Last, if you’ve maximized your retirement account savings and still have money to put away, contributing to a taxable account is the best way to go. JT Beck shares some insight on these accounts in his recent post, A Guide to Investment Accounts.
Since everyone has different expenses and costs of living, it’s hard to give out blanket advice on how best to spend your money. While saving for retirement early is important, it’s also important to set realistic expectations about how much can be saved. Many investors don’t end up maximizing their retirement contributions for years, if ever, so truly any amount you can put aside will benefit you. Below are a few tips that can apply to almost anyone:
- I know this isn’t groundbreaking advice, but the importance of developing a budget can’t be overstated. Having a budget not only lets you know what you can (and can’t) afford, but also provides a baseline for savings goals to be set.
- As part of your budget, don’t forget to set up an emergency fund to cover at least 3 months’ worth of expenses. When things are going well, this might seem like too much to set aside, but you’ll be glad to have a cushion once unforeseen expenses start popping up.
- As Dan mentioned in his 401k Millionaire post, setting up recurring contributions early on can be a pain-free way of “forced” saving; it’s hard to miss money you were never seeing in the first place. While Dan mentioned raises at work being a good opportunity to increase savings, there are also “raises” you can give yourself in everyday life that can benefit you. For example, let’s say you’ve made a budget and have a goal to pay off your credit card with $200/month payments. Once the card is paid off, putting that $200/month toward a retirement account would be a great idea.
- For the more than 66% of college grads with student loans, saving for retirement often takes a back seat to paying down the debt they’ve accumulated. While the debt is unavoidable, there are a few things that can be done to lighten the burden.
- Regardless of the interest rates on your loan, it’s a good idea to keep an eye on what rates you could get by refinancing. Even “small” declines in interest rates can mean significant savings over the life of your loan.
- If you find your regular loan payments hard to manage, it’s worth calling your lender to discuss income-based payment options.
- Those who work for a qualifying government or non-profit organization should look into public student loan forgiveness (PSLF). Under PSLF, borrowers that make 120 qualified monthly payments while working for their qualified employer will have the remainder of their loans forgiven. This program is income driven, however, so may not be as beneficial to higher earners.
If you’re a young professional looking to get on track for retirement or if you have other questions about personal finance, please feel free to reach out to us at any time. For our current clients, your Financial Strategist is more than happy to help with any questions you may have.