Saving for Retirement

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Your Investing Life: Starting your first full-time job

December 08, 2015

Your first full-time job may be your first step toward financial independence—in the short term and the long term. If you're a recent college or high school graduate, you may be driving your own car, renting your own apartment, and paying your own bills for the first time without any help from mom and dad.

Now is the best time to consider the approaching years and decades and think about what kind of life you'd like to lead after you retire. If you make wise financial decisions in your early 20s, it's possible to retire with more wealth, more options, and more freedom than you ever considered. You may even be able to retire early.

Stephen Weber"Young people should be thinking about financial independence," said Stephen Weber, an analyst in Vanguard Investment Strategy Group. "You're building freedom in the sense that money you'll have later will give you options in life."

Catching the compounding wave

Unlike so many aspects of investing success—such as market performance—how long you invest is likely within your control. And the longer you invest, the more time you'll have to harvest the power of compounding—the multiplying effect that occurs when your earnings generate even more earnings.

You can take advantage of compounding if you start saving for retirement when you're just beginning your career. Here's an example of two investors—one 25 and one 35, both saving $1,000 a year and earning a hypothetical 6% return.

Power of compounding

Source: Vanguard Investment Strategy Group.

Note: All investing is subject to risk, including loss of principal. This hypothetical illustration assumes a $1,000 annual investment for 30 years at a 6% annual return. It does not represent the return on any particular investment.

"Every dollar you save at age 20 can be worth twice as much as a dollar saved at age 35—and ten times as much as a dollar saved at age 55," Mr. Weber said. "When getting started, you may not feel as if you have the resources to save a lot. But you have one resource in abundance, which you won't have later—time. You don't want to waste this gift, and thanks to compounding, getting started right away can really pay off in the end."

Choosing an investment account

Now that you're earning a paycheck, make sure you pay yourself first—before you pay your bills, save a portion of your income in an employer retirement plan, such as a 401(k), a 403(b), or an Individual Retirement Account (IRA). You should aim to put 12%–15% of your salary toward retirement. At the very least, contribute enough to get whatever percentage your employer matches (if it does).

"If there is a company match and you don't sign up for that plan, you're taking a voluntary pay cut,"; Mr. Weber said. "Your company is allotting that money to be spent on your behalf. You should take it."

Chuck RileyChuck Riley, a senior financial advisor in Vanguard Personal Advisor Services®, explained the potential benefits of Roth 401(k)s (if your company offers them) and Roth IRAs. "Roth 401(k)s and IRAs offer no tax benefit for contributions, but earnings and withdrawals are mostly tax-free. On the other hand, contributions to traditional 401(k)s and IRAs are tax deductible, and retirement withdrawals are taxed," he said.

Because you invest after-tax dollars in a Roth 401(k)s and IRAs and can make tax-free withdrawals when certain conditions are met, a young investor's lower income—and lower tax bracket—can be an advantage. Young investors can also benefit from years of tax-free compounding and the ability to withdraw contributions from a Roth without having to pay taxes or penalties. Additionally, distributions are penalty-free for first-time home purchases (up to a $10,000 lifetime maximum) and postsecondary education expenses.

Both 401(k)s and IRAs can be funded with automatic investments directly from your paycheck or bank account. What you can't see, you can't spend.

"You can save without having to think about it," Mr. Weber said.

Choosing your investment

Along with choosing an investment account, you need to choose an investment. The possibilities may seem infinite, but above all else, consider the importance of building a low-cost portfolio that is diversified across and within asset classes.

"The reality is, for very long time periods, you should primarily invest in stocks," Mr. Weber said. "Having some bonds is good, too. Bonds can mitigate the effects of volatility in the market and offer diversification."

Target-date funds are a popular feature in the lineup of most retirement plans. The asset allocation of these funds becomes more conservative over time.

"Target-date funds allow you to maintain an asset allocation that's appropriate for your age and anticipated retirement date," Mr. Weber said.

Avoiding new debt and paying down old

It's easy for a young investor to fall into the debt hole. At this stage, you can't control whether you have student loans or the size of the loans, but you may be able to control how quickly you pay them off and avoid taking on new debt.

"When you transition from a college student to a wage earner, you may experience pent-up demand after living on a strict budget for years," Mr. Riley said. "Young investors tend to spend a little more and go deeper in debt. I encourage them to take a hard look at their lifestyle and find the right balance. You don't have to live a Spartan lifestyle, but keep your spending in check."

Mr. Riley added that paying off student loans is "compounding in reverse."

"Give yourself a goal of paying off your student debt in five or eight years, so you're dictating when you'll get out of debt, not the creditor," he said. "Until the debt is paid off, you're not creating wealth."

Stashing funds for emergencies

Along with investing for retirement and trimming debt, it's crucial to build a short-term savings account in case of an emergency. It doesn't have to be huge, but it does have to be adequate enough to serve you in case the unexpected occurs. Both Mr. Riley and Mr. Weber recommend stashing about 3­–6 months' salary in a money market fund or bank account.

"You don't want to be in a situation where a significant expense comes along and you don't have the flexibility to deal with it," Mr. Weber said. "Setting aside some cash in an account that's easy to access and doesn't fluctuate in value gives you something to fall back on."


  • All investing is subject to risk, including the possible loss of the money you invest.
  • When taking withdrawals from a 401(k) or an IRA before age 59½, you may have to pay ordinary income tax plus a 10% federal penalty tax.
  • Please remember that all investments involve some risk. Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.
  • For more information about Vanguard funds, visit Vanguard mutual funds or call 877-662-7447, to obtain a prospectus. Investment objectives, risks, charges, expenses, and other important information about a fund are contained in the prospectus; read and consider it carefully before investing.
  • Investments in target-date funds are subject to the risks of their underlying funds. The year in the fund name refers to the approximate year (the target date) when an investor in the fund would retire and leave the work force. The fund will gradually shift its emphasis from more aggressive investments to more conservative ones based on its target date. An investment in target-date funds is not guaranteed at any time, including on or after the target date. Diversification does not ensure a profit or protect against a loss in a declining market.
  • We recommend that you consult a tax or financial advisor about your individual situation.
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