Most college students focus their energy on midterms, tuition bills, concerts by singer Post Malone, spring break plans, and maybe finding their first job after graduation. Retirement? That feels like a lifetime away. When you’re still in your teens or early twenties, thinking about something that is decades away may seem unnecessary.
But in reality, starting to save for retirement during college is a wise financial move. Due to the power of compounding and time, even small contributions made during your student days can potentially grow into significant wealth in the future. More importantly, by establishing good financial habits now, you will have the freedom, security, and choices you need in the future.
In this article, we will explain why saving in college is crucial, what retirement accounts are, how they work, and how much you should allocate.
Although it may not seem like a big deal today, saving for retirement during college (or even earlier) should start for several reasons.
Compounding is “interest on interest”. Basically, it is the interest you earn on the principal (initial amount) plus the interest accumulated in previous periods. As a college student, this can work either in your favor or against you. The key to making it work for you lies in time.
Simply put, the earlier you start, the less effort you need to reach the same goal.
The amount you start with doesn’t matter. Over time, even contributing $25 to $50 per month can accumulate into a meaningful retirement reserve. It’s like planting a seed. With time, it grows into a tree that provides shade and security.
Saving for retirement in college is not just about money; it’s also about discipline. If you practice saving part of your income now, you are more likely to stick to your saving plan after graduation. Once a habit is formed early, it tends to be maintained long term.
As you age, the cost of living will increase. Healthcare will become more expensive. Social security may no longer be as reliable as in the past. However, the earlier you start saving, the more likely you are to survive inflation and uncertainty.
Unstable income may make saving for something decades away seem daunting. Fortunately, retirement accounts are not entirely untouchable.
Due to this flexibility, your retirement savings are not “locked up” as you might imagine. Nevertheless, it is still best to let this money continue to grow and avoid accessing it easily.
A retirement account is a special type of savings and investment account designed to encourage long-term investment. The biggest advantage? Tax benefits.
Unlike regular savings accounts, retirement funds are typically invested in stocks, bonds, or mutual funds.
For most college students, a Roth Individual Retirement Account (IRA) makes the most sense. Since you are likely to be in a lower tax bracket, paying taxes upfront is relatively less painful. In the future, when your income is higher, you can withdraw funds tax-free.
If you are under 18, your parents or guardians can open a custodial Individual Retirement Account (custodial IRA) for you. This account is tied to your social security number, but they control it until you reach 18 to 21 (depends on your state).
Retirement accounts are like a greenhouse: you can nurture these seeds (contributions) until they grow into larger fruits (your retirement savings).
Even if your budget is tight, there are simple, low-cost ways to start:
This is an excellent choice for short-term funds with no risk. You can withdraw from the savings account at any time, while certificates of deposit lock in your funds at a fixed rate for months or years. You can use them to save for tuition or other upcoming expenses.
On platforms like Fidelity, Charles Schwab, Robinhood, or Webull, you can invest with zero trading commissions and no minimum investment. This allows you to keep more of the money you earn.
Fractional shares allow you to invest as little as $20 or $30 per month. Consistency in investing is more important than the amount when you start. This builds habits and helps you accumulate savings.
Not interested in picking individual stocks? Index funds are simple, low-cost, and diversified. Warren Buffet recommends the S&P 500 index fund, which invests in hundreds of top US companies.
Platforms like Betterment or Wealthfront manage investment portfolios based on your goals. The annual fee is typically around 0.25%, and you can start with as little as $20.
Apps like Stash and Acorns make investing easy and automatic. Stash allows you to start with $5, while Acorns rounds up your purchases and invests the spare change.
Additionally, Acorns Later offers Roth and traditional personal retirement account investment platforms to help users save for retirement. It provides potential tax benefits in addition to age-based investment portfolios, recurring deposits, and wage allocation to manage retirement savings.
If you are working, whether part-time or in summer jobs, you can open an individual retirement account. A Roth IRA is usually the best choice for students. The earlier you contribute, the more you can benefit from tax-free growth over several decades.
You need to consider your income and expenses, but here are some guiding principles:
The outcome is as follows:
Ultimately, time is what truly matters, not the amount of money, emphasizing the importance of starting early.
While you are busy preparing for finals, navigating roommate relationships, and planning for life after graduation, retirement may seem far off. However, it is for this reason that you should take action during your college years. The earlier you start, the more time your funds have to grow, and the less financial stress you’ll face in the future.
By utilizing tools like Roth IRAs, robo-advisors, index funds, and regular contributions, you will gain a significant advantage. Think of it as a gift to your future self. The sooner you start, the more freedom, choices, and security you’ll have in retirement.
As you strive to earn a degree and save for spring break, take a small step today: open a retirement account. As you grow older, you will increasingly appreciate the decision you made back then.