Kansas State University


Powercat Financial

Tag: retirement

Start Saving Now!

Planning for a future 40 years from today may seem impossible, crazy, and downright unnecessary… especially when it’s hard enough to see past that dreadful exam you haven’t started studying for. While retirement is in the far off future, saving for retirement early will help you maintain your standard of living as you enter your 70s and help you avoid turning back to your college ramen noodle diet.

Why Save Now?

Ideally, you should start saving in your 20s, once you graduate and begin earning paychecks. By starting a retirement fund today, your investment will have more time to grow and compound, meaning that each year’s gains will generate their own gains next year. The following graph shows the impact of investing early.

This chart assumes a 7% annual return. Investing $5,000 annually between the ages of 25 and 65 will result in a total of $1,142,811 for retirement. Your retirement fund will have $602,070 more than if you would have waited to make the exact same investment…10 years later. For further comparison, if you only invested between the ages of 25-35 (10 years), you would have earned $61,329 more than investing between the ages of 35-65 (30 years), all else equal.

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That sounds great! So how do I get started?

How you plan for retirement when you’re younger will differ from when you’re older. When you’re younger, you should save at least 7% of your salary for retirement. With the average salary of those between the ages of 20-30, $32,000, your average annual retirement savings will be approximately $2,240. This equates to putting away $43 per week, or giving up a few Starbucks coffees or Uber rides.

Many employers will offer a 401(k) retirement savings plan. If your employer offers to match your 401(k) contribution, take advantage of this benefit by contributing at least the amount that they’ll match. By doing so, you will double your retirement contributions at no additional cost to you.

If your employer does not offer a 401(k) plan, you might consider an IRA (Individual Retirement Account) as a means of investing for retirement due to their tax savings. You can open an IRA through your bank, or other entities such as Wells Fargo or Edward Jones. When choosing what to invest in, you will want to invest more aggressively when you are younger. This means you will want to invest in high-risk/high-yield options, such as stocks. Even if your investments perform poorly in the short run, you will have time to recover financially prior to retirement. Investing is no easy task and many choose to hire a financial planner. To ensure your planner is top-notch, you can utilize http://www.plannersearch.org/ to search for planners who are certified.

I Can Rely on Social Security, Can’t I?

In order to be well prepared for retirement, it is a good rule of thumb to save the equivalent of 85% of your end-of-career salary for each year of retirement. For example, let’s say you make $80,000 per year at the end of your career. You will therefore need approximately $68,000 per year in retirement, or a total of $1,360,000 for all 20 years. The average Social Security monthly retirement payment is only $1,334.21. This comes out to just $16,010.52 per year, leaving you $51,989.48 short each year.

Budgeting Your Life with Your Finances

Saving for retirement shouldn’t mean compromising your dreams and goals in your 20s. By creating and utilizing a budget, you can balance your financial responsibilities (saving for retirement, student loan payments, rent, etc.) with the things that matter to you (buying that engagement ring, backpacking across Europe, finally buying food other than ramen, etc.). To kick start your budget, you can utilize the Spending Plan Worksheet that can be found at www.k-state.edu/pfc/budgeting. For more hands on help with saving for retirement or budgeting, feel free to set up an appointment with a peer financial counselor by going to www.k-state.edu/pfc/services.  By making the choice to start saving for retirement today, you will greatly increase your wealth, opportunities, and lifestyle in the future.





Jillian Taylor
Peer Counselor III
Powercat Financial Counseling

IRAs: What They Are and What They Can Do For You

What is an IRA?

An IRA is an individual retirement account in which you can contribute up to $5,500 per year (2014), with an additional $1000 when you are 50 years and older, to save for your retirement. Most banks, mutual fund companies, and brokerage firms offer IRAs.  You must have earned income in order to contribute, and you can start withdrawing at age 59½.  There are two types of IRAs:

Traditional IRA:

  • Money goes in before taxes
  • Taxed on withdrawals
  • Must start withdrawing specified amounts at age 70½
  • 10% early withdrawal fee in most cases

Roth IRA:

  • Money goes in after taxes
  • Money isn’t taxed again, not even on the interest accrued or at withdrawal – allows your money to grow tax free
  • Not required to withdraw money at a specific age
  • Can withdraw early with no penalty for a first-time home purchase (up to $10,000) or in the event you become disabled

Some logic to consider about these is that when you first graduate and start out at a new job, generally you will be in a lower tax bracket than you will be as you reach retirement.  This being the case, it may be better to go with a Roth IRA so that you are taxed at a lower rate than you would be if you paid taxes upon withdrawal as with a traditional IRA.  On the other hand, if you don’t open an IRA until you have been working for several years and you are in a higher tax bracket, you may want a traditional IRA instead, since you will most likely drop to a lower tax bracket by the time you withdraw funds—this would happen if you were no longer earning income.  Try to choose the one that is the most taxably efficient for you depending on your situation and your plans.  Historically, tax rates tend to increase over time; however, there is always a possibility that the rates will be lower when you withdraw the funds, so this is another factor to consider as well.

Why Save Now?

You might be thinking, “I have student loans I need to pay off for the next 10 years, I can’t afford to save now,” or, “I’m only in my early 20’s, I have plenty of time to save for retirement.”  While these may be true, the reality is that life costs money.  Saving early, even if it is a minimal amount, will pay off.  If you are thinking that you want to retire at age 65 to 67, you have to consider how much you will realistically need to live on for 20-30 years after you retire.  You should also consider that you may not be the only one you need to provide for during that time: you may have a family to support as well.  Time is of the essence when it comes to saving for retirement.  If you start early, you will save yourself much stress later on.  If your employer offers you a retirement plan, take full advantage of it.  That alone, however, may not be enough to support you in retirement; this is why it is important to consider other avenues of saving such as IRAs, a savings account through your bank, or even investment portfolios.

Even if you have student loans or any other debt you are paying—such as a mortgage or car loan—it is still important to be saving.  Think of it as paying yourself.  You want to “pay yourself first”—you are investing in your future!  A good rule of thumb for saving is to set aside 10% of each paycheck.  Depending on your situation, you may want to save less than that in order to pay your bills, but if you are able to save more than that, you should.  There may come a time in your life when you aren’t able to save much at all for whatever reason, and you want to be able to have a cushion for those times.

The following is an example from PracticalMoneySkills.com of how postponing savings can hurt you:

The longer you delay saving, the harder it is to catch up…if you saved $100 a month at 8% interest, after 20 years your account would be worth $57,266. But wait only two years to begin saving and that balance would shrink to only $46,865 – over $10,000 less. A five-year delay would reduce the balance to only $33,978.

The Magic that is Compound Interest

Compound interest is a very powerful tool.  To illustrate, let’s say you are able to find a savings account that offered 8% interest on your money—this, unfortunately, is not a realistic bank account rate currently; however, if you shop around in the investment arena, you should be able to find higher rates of return.  If you started putting $100 per month into the account, you would have $450,000 by age 65.  If you put in $200 per month, you would have $900,000 in the same amount of time; and if you increased the amount to $300, you would have $1,000,000!  How cool is that?  This is how IRAs work.

This site also has many other calculators that you might find useful.

To learn more about compound interest, visit: http://www.practicalmoneyskills.com/personalfinance/experts/practicalmoneymatters/columns/compounding_110708.php

Saving Tips

If it is hard for you to save, whether it is something you easily forget, or it is just difficult for you to physically transfer money into savings, one simple solution is to have a portion of your paycheck go directly into savings.  When setting up a direct deposit through your job, you can specify how much you want to put into a separate savings account, whether this be a percentage or a dollar amount.  This way you won’t “miss” the money; you will be accumulating funds without even noticing that the money isn’t in your checking account.  You can also set up an automatic transfers from your checking to your saving account by talking with your bank.


Rachel Vogler
Peer Counselor II
Powercat Financial Counseling