Financial experts urge saving for retirement

Final exams, graduation and landing a job are all important topics to consider as a college student. But should students really be worrying about retirement when they’re preoccupied with these other things? After all, most students won’t be able to retire for another 40 to 45 years, and there are many more financial obligations to worry about now. The short answer from a university financial expert is yes, they should worry about retirement.

When to save
UW-Eau Claire professor of economics Frederick Kolb said the sooner a student starts investing, the better off he/she will be in the future.

“Even if it’s a small amount,” Kolb said. “But if the breaks go bad in the car, do that first.”

Junior Andrew Baldwin, a psychology major, said he has yet to worry about his retirement nest egg.

“I’ve been unable to start saving because of current financial obligations,” Baldwin said, adding he needs to pay for other things up front rather than save for the future.

How to start
There are many ways to save for retirement, such as putting money into an employer’s 401(K) plan. Students can also open other Individual Retirement Accounts, more commonly referred to as IRAs.

Kolb said students should really consider opening a Roth IRA, a type of retirement account where the money is tax-free when withdrawn from the account.

Kolb describes a Roth IRA as an “umbrella” or “tent” account. Under the “tent,” several different assets are kept, from stocks, to bonds, to real estate. And the owner of the account can decide where they would like their savings allocated. He also said Roth IRAs allow the owner to withdraw money without penalty for select circumstances, where other accounts such as a 401(K) or Traditional IRA penalize for early withdrawal. He said withdrawing money from a Roth IRA to pay for education or to finance a person’s first home are two circumstances where an owner can take money from the account without penalty.

Because of the tax-free perk of a Roth IRA, Kolb said annual contribution limits are in place, making it so owners of the account cannot deposit large sums of money. For the 2007 contribution year, the annual limit for Roth IRA contributions is set at $4,000, according to the Internal Revenue Service.

Kolb said the best way to ensure money is available for retirement is to have your employer automatically deduct a certain percentage of each paycheck to go toward a 401(K) plan, which employees can eventually roll over into a Roth IRA.

“If you earn money and some of that money is saved before you even get a check, then you’ll be able to just live within your check,” Kolb said. “If the money is included in the check, chances are it will get spent,” adding consumers are continually bombarded with messages encouraging them to spend their money now rather than wait, and consumers are “sloppy” with their money.

Kolb also said a college grad would probably not notice a difference in quality of living if 10 percent of wages were put away automatically. He said if a student made $40,000 after graduation and stuck 10 percent away, he or she would be getting a $36,000 check, which wouldn’t make much of a difference, and 10 percent makes even less of a difference when salaries increase from $40,000.

What assets are most important?
Because a Roth IRA allows owners to allocate their money to whatever assets they choose, Kolb said owners need to look at when they’ll want their money, adding some assets are less risky than others – yet the more risky ones gain the most over the long haul.

He said college students investing for their retirement should put their savings almost, if not completely, into stocks. More specifically, he said students should choose to put their money into an index fund, a grouping of stocks, which is composed of small company stocks. But he said small company stocks are the most volatile of the stock markets, bouncing in value from day-to-day and year-to-year.

“In the short-term, stocks are dangerous,” he said, adding stocks always do better over time and 20-year averages for stocks have always been positive. “Most people just don’t understand how much stocks have gone up.”

Kolb said the best thing for people to do when they open a retirement account is to ignore it, and the worst thing would be to pull money out early. He said people should never try to time the market or predict what it is going to do, they should just always know that it will gain over the long-run.

“Put money into stocks, hold them in a Roth and close your eyes,” he said of retirement strategy. “It’s that simple. And there’s really something nice realizing that you’ll be OK (in the future) and that there’s money there for you.”