Between juggling classes, jobs, internships and trying to carve out some resemblance of a social life, retirement might seem like a distant concern for most students.
Students are thrown into a series of trials as soon as they turn 18, such as doing taxes every year and voting nearly every year. Then, expect to discuss adult topics at the holiday table when you upgrade from the kid’s corner.
Suddenly, you’re complaining about taxes or maintenance projects and you realize you sound like your parents.
An adult responsibility out of focus for a new adult is retirement. The future decades away is not a stressor yet for people in their twenties.
With everything students are attempting to accomplish within a few years, it’s understandable why many young adults don’t prioritize financial planning for their future.
Starting a Roth IRA now, as a student, could be one of the smartest decisions to make for long-term financial stability.
A Roth IRA is an individual retirement account that allows your investments to grow tax-free. This means that while you won’t get an immediate tax break on your contributions, you will enjoy tax-free withdrawals in retirement, provided you meet certain requirements like being over 59 ½ and having owned the account for at least five years.
“Tax-free” should immediately bring joy. It does to me.
With compounding interest and years of growth ahead, contributions now could result in a comfortable cushion later in life, especially as older generations in Wichita suffer from homelessness as a result of increased property taxes, despite a fixed income after retirement.
Why start young?
Time is the greatest asset when it comes to investing. The earlier you start, the more time your money has to grow.
Even if you’re only able to contribute a small amount while in college — say, a few hundred dollars per year — it will add up over time.
For instance, contributing $2,000 a year starting at age 20 could grow to nearly $500,000 by the age of 65, assuming a 7% average annual return. This snowball effect is due to compound interest, where your returns begin to generate their own returns.
These are big numbers for broke college students to think about without getting stressed. For my Roth IRA, I invest $14 every two weeks, which lines up with my direct deposit. It is set to automatically come out, but it is an optional setting that can also be canceled and directly managed.
The best part? The Roth IRA gives flexibility. While it’s designed for retirement savings, contributions can be withdrawn at any time, without penalty. So, if there is an emergency or need to tap into your savings down the road, you won’t be penalized for accessing your contributions.
Benefits now and later
A Roth IRA’s tax advantages are particularly beneficial for students. Young adults’ incomes are likely lower than it will be later in life, putting them in a lower tax bracket. By contributing to a Roth IRA now, you’ll be paying taxes on that income at a lower rate.
In retirement, when you’re more likely to be in a higher tax bracket, your withdrawals will be tax-free, allowing you to maximize the money you saved.
For many students, the immediate thought of saving for retirement feels far off. But consider the future freedom it affords.
While Social Security may offer some support, there’s no guarantee it will cover all your needs. A Roth IRA ensures that you are building your own financial safety net, giving you control over your future.
Weathering market fluctuations
One of the concerns with investing, especially for first-timers, is market volatility, or how it rapidly and unpredictably changes. It’s natural to feel anxious when the stock market dips, particularly when you’ve invested hard-earned money.
The reality is that the stock market has consistently trended upward over time. Short-term fluctuations are inevitable, but over the long haul, your investment will likely grow.
For example, during the 2008 financial crisis, many people panicked and withdrew their investments when the market crashed. While that might seem like a smart move at the moment, it’s often better to ride out the storm, especially if you’re decades away from retirement.
If you’re in your 20s or 30s, you have time on your side. The market will recover, and by staying
invested, your money will grow when it bounces back.
If retiring is right around the corner, then taking it out to get the most money you can before it crashes, so that you can comfortably retire in a year or two is fine.
Getting started
Starting a Roth IRA is relatively simple. You’ll need basic information like your Social Security number, bank account details and your employer’s name and address.
After that, it’s just a matter of choosing a provider — many offer low or no fees for setting up an account. Vanguard and Fidelity, for instance, are well-known for offering beginner-friendly investment options with low costs.
I use Fidelity. It has felt like an easy transition into understanding how the investments work, the accounts underneath a person as well as what different terms or numbers mean.
While it might feel premature to focus on retirement while balancing the chaos of student life, starting a Roth IRA now can help secure your future. By taking small steps today, you’ll be setting yourself up for financial stability and peace of mind for years to come.
When it comes to investing for retirement, time is your best ally.
