Used with permission from The United States Securities and Exchange Commission.
Your first job is an important step on the road to adulthood and financial independence. If you haven’t done so already, it’s also a chance to start savings for future goals.
It may feel like there are many demands on your income: rent, credit card debt, school loans, or car payments. But workplace savings plans are the easiest way to save.
Check to see if your employer offers a retirement plan, such as a 401(k) or 403(b) plan. Some employers automatically enroll new employees in such plans. But usually, you need to take the first step and enroll yourself. When you sign up, you’ll need to choose the amount you wish to contribute from each paycheck, and where you want the money invested. You may have a choice of mutual funds, including index funds and target date funds.
Often, there’s “free money” involved. Your employer may contribute a certain amount to your retirement savings plan and match contributions that you make up to a certain level. If, for instance, an employer contributes 50 cents for every dollar you save, that’s an immediate 50% return. There is no other investment that will give you that kind of guaranteed return – don’t pass it up.
Some employers offer traditional defined benefit pension plans. In this type of plan, the employer contributes the money, invests it, and pays a benefit to retirees based on their pay and the number of years they worked for the employer.
Whether or not your employer has a retirement savings plan, you can start saving with an Individual Retirement Account, or IRA. There are traditional and Roth IRAs, which offer different tax advantages.
There are income limits on who can contribute to an IRA, along with annual contribution limits. Keep in mind that you can start an account with a relatively small amount and increase contributions later when your earnings increase and you have more to save. By starting early, you will need to save a lot less later on.
When you change jobs or think you need some extra cash, resist the urge to cash out these accounts and spend the money. Instead, leave it there and watch it grow.