First Job, Let’s Plan for Retirement

Congrats on getting a job! Now we need to plan for your retirement. Saving can be hard, especially when you are a fresh grad out of college making $50,000 a year. The number one thing you can do is to pay yourself first by maxing out your 401k (assuming it is offered by your employer) and maxing out your Roth IRA contributions. Since a 401k and a Roth IRA are considered retirement accounts, you cannot withdraw* this money until you are ready for retirement; still, this is the best form of savings you can have for your retirement.

*Withdrawals can be made if there is a life event such as the purchase of a home as explained by the IRS. We will cover this in a future post.

Why start early?

  • The 401k maximum is $18,000 for 2017, this will allow you to take the largest tax break today.  50k-18k = 32k.  Federal Taxes will drop to 15% on 32K vs 25% on 50K. (Tax Brackets)
  • Train yourself – Starting early and at your first paycheck you will train yourself to make less but really you will be preparing yourself for financial freedom.  Psychologically if you train yourself that you really only make 32,000 a year, you will spend accordingly and at the same time be saving for retirement.
  • Don’t stop at 401k, max out your Roth IRA as well.  Roth IRA is a retirement account which you can contribute post-tax dollars to.  The maximum for 2017 is $5500, but any gains in this account will be tax- free.

In the following example: we look at two possible scenarios: One 22-year-old contributing the maximum to 401k and Roth IRA, And another 22-year-old contribute $5,000 to 401k and waiting till 46 to contribute to Roth IRA.  We also track their salary, this is to show that once you hit the Roth IRA income limit you can no longer contribute to it.

Disclaimer:  These numbers are hypothetical, the primary goal of the chart is to show that saving early will pay off.  We are assuming all accounts see an average return of 4% and salary increase 3% annually.

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