Think About It: Saving a little today will create cushy nest egg for tomorrow

By JP Krahel

Life after graduation is going to be something else, let me tell you now. We’ve got a top-shelf education propelling us, hopefully, into first-rate jobs; we’ve developed the social skills to network our way to the top; and then, one day, we’ll retire into a life of squalor and misery. Sweet.

Wait, what?

Let’s look at the facts. There’s going to come a point in time where you’ll want to stop working and start living the sweet life. That point may or may not have come already, so let’s be more realistic. You’re going to retire someday. How will you support yourself for the rest of your life?

If you said, “Social Security,” I’m sorry to say that you’re misinformed. The Associated Press reports that Social Security should run out of funds by around 2041, right when today’s college senior turns 55. So, that’s out.

What else is there? What if I told you that your very youth could turn into your best safeguard against an under-funded, borderline-impoverished retirement? What if I said that by sacrificing just a few thousand dollars every year, you could retire with more than $1 million to spare? The Individual Retirement Account, or IRA, can assure you that you’ll be living quite comfortably into your retirement, so long as you start now. The math of this is the really sexy part, so we’ll start there.

Compound interest is a term you’ve probably heard. If you haven’t, it’s pretty simple: say you invest a dollar in the bank at 10 percent annual interest on Jan. 1, 2008. On Dec. 31, you’ll get a statement that says you’ve earned 10 cents on your dollar investment. Unless you withdraw that dime, the 10 cents will also earn interest next year. So, at the end of year one, you’ve got $1.10. Year two, it grows to $1.21. By year 10, your dollar has become $2.35, and you haven’t had to do a thing.

Now, we can have a little fun with this. What if, instead of 10 percent, we brought the number down to a more realistic 4.5 percent? Instead of a dollar, you put $4,000 (the maximum amount you can contribute for 2007) into your IRA, and you do it every year. The bank tacks on interest once a year. Let’s also assume that you’re an 18-year-old, and you do this every year until you retire at age 60. That’s a total of 43 years spent saving and $172,000 of straight cash invested. Not exactly chump change. The effect of compound interest, however, turns that $172,000 into $523,655. Saving $11 a day, every day, for the rest of your life, gives you an excellent safety net when you retire.

It’s very easy to think to yourself, “I can do it next year.” Very, very easy. Very foolish, too. Say you still want to retire at 60, but you only get around to starting this when you’re 25. You’d wind up with only $360,000. What if you delay until you’re 30? You’d have to retire on only $271,000. You don’t even want to know what happens if you wait until age 40.

So what do you do? Make a few phone calls. Hit up Google and look for IRA resources. Talk to your parents. Talk to their accountants. Figure out where you can squeeze your budget a little bit. Just a little bit of sacrifice now will give you tremendous peace of mind for years to come. If you arrange it right, and this is where the accountants come in, there is simply no better, safer, more intelligent investment for a college-aged man or woman to make.