How Broke College Students Can Start Saving for Retirement Now

5 min read Thinking about retirement for a college student might seem crazy, but if you want to live a financially free life, the time is now.

Woman holding money

Photo Credit: (Sharon McCutcheon) Young woman holding money.

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By Dylan Lepore | dlepore1@radford.edu

Thinking about retirement for a 21-year-old college student might seem crazy, but if you want to live a comfortable or financially free life, the time is now.

According to a 2016 College Students and Personal Finance Study by Dave Rathmanner, 43 percent of students surveyed said they don’t track monthly spending while 58 percent of students surveyed reported saving no money each month.

Today I am here to break the barriers of entry to show how simple it is for a college student to start saving for retirement even if they don’t have much money to start. (I designed this article for those who don’t have someone else saving for them or much to rely on such as wealthy parents, social security, pension fund, etc.).

I have several accounts, including two checkings, one savings, one retirement account, and two brokerage accounts that I have independently researched and thoroughly use. I save about 80 percent of my monthly income while I’m in college and still live at home over breaks, where I can keep my expenses low and still enjoy my life.

Today I am here to break the barriers of entry to show how simple it is for a college student to start saving for retirement even if they don’t have much money to start.

Last year I made $12,329.71 and spent $4,551.33. I managed to save 63 percent of my yearly income.

So, How Much Do You Need?

Before you even start saving money, you need to get your finances together.

Income: How much do you make a year after tax? 

Expenses: What are your bills and monthly costs and fees such as rent, utilities, groceries, clothes, insurance, gas, etc. Honestly evaluate how much you need to live.

When: Lastly, when do you want to retire and why?

I highly recommend Mint.com for tracking all your finances as you can connect almost all of your accounts to it, and it will show your transactions, net worth, credit score, trends, and more. Also, it’s free.

To quickly find out how much you need to retire, a good rule of thumb is to find out how much you spend a year on everything and times that by 25 years (or whenever you want to retire).

Networthify’s When Can I Retire Calculator also helps break down how much you currently have versus how much you are spending plus how much you save. It will give you an estimate on when you will retire as it states, “When your annual return on investments cover[s] 100% of your expenses, you are financially independent.”

A hundred dollar bill
Photo Credit: (Colin Watts) A US 100 Dollar bill in close up.

Time is Money

So, you are broke and don’t have a career yet, but you get by at an average part-time job making minimum wage (Virginia is $7.25 as of writing this column). While this may seem like nothing, and it is, you have one advantage that the wealthier older folks don’t: that’s time. And time is money.

Compounding interest is the best thing since sliced bread. Let’s take a look:

Assuming that you work 35 hours a week for $7.25 (no income tax is deducted for this example), that is $253.75 a week or $1,015 a month.

Let say you save 10 percent of your monthly income; however, when you started saving, you made an initial deposit of $1,000. So, every month, you would add $101.50 to your initial deposit. 

So, you are 21-years-old and want to retire at 46, using the Investor.Gov Compound Interest Calculator, your initial deposit of $1,000 plus your 10 percent contribution each month for 25 years, somehow still working at the same part-time job, will have grown to $71,116.85 when you only contributed $31,450. (Assuming an annual 6% return. The example doesn’t represent any particular investment, nor does it account for inflation.)

In comparison, if you were 30 and still wanted to retire at 46, worked at the same part-time job providing the same 10 percent contribution each month, but made an initial deposit of $10,000, you would have grown to $56,672.60 when you only contributed $29,488.00 in 16 years.

That is the beauty of compound interest over time. Start early.

That is the beauty of compound interest over time. Start early.

Simplified Ways to Gain

According to the Social Security Administration, they expect the funds to pay Social Security benefits to become exhausted in 2037.

Don’t think you are doomed because of this; there are plenty of retirement plan options after turning 21-years-old.

401(k)

If you are working for a company, you’ll probably have a 401(k).

A 401(k) allows you to put pre-tax money into the account (money that isn’t taxed initially; it grows until you withdraw and taxed at the end). This system allows you to grow all of your money without any of it taken away.

The next best thing about the 401(k) is the 401(k) match. Employers can offer a 1:1 match up to $2,000, meaning if you apply to put $2,000 in your 401(k), the employer can match that and put $2,000 in the account. They give you free money.

Pile of money
Photo Credit: (Annie Spratt) Assorted bank notes.

Traditional and Roth IRA

Investing in a traditional individual retirement account (IRA) is not the best option for most broke college students in their 20’s. 

You can put in up to $6,000 a year in your account or $500 a month. That is with pre-tax income, meaning your taxable income reduces by the amount you pay into your Traditional IRA. The money you put in will grow tax-free until you withdraw it when you retire.

However, if you withdraw money from the Traditional IRA, you’ll have to pay federal and state taxes on it. It’s supposed to be used as an annual retirement income supplement and only for retirement.

On the brighter side, there is the Roth IRA.

You can open a Roth IRA with post-tax income where you will not deduce your contributions.

But, when you are ready to retire and withdraw from the account (after 59½, that’s the rules), you will owe no taxes on it—and that includes all the money your contributions earned over all those years.

Also, broke college students that need money can borrow the contributions (the principal)—not the earnings—if you need to before you retire.

Also, broke college students that need money can borrow the contributions (the principal)—not the earnings—if you need to before you retire.

Lastly, if you earn more than $122,000 a year, which is adjusted annually by the IRS, you cannot contribute to a Roth IRA. This fact is why the Roth IRA is more forgiving and lenient to lower-income people.

I recommend HonestDollar by Goldman Sachs & Co if you want to open an IRA account. As there are little to no fees and it can put your account on autopilot if you’re not comfortable choosing bonds, ETF, and index funds. 

Retirement may seem far away, but it’s closer than you think. Start early, work hard, and earn as much as you can and then save it into a high interest-bearing account, because time is on your side, as we’ve seen from compounding interest.

Don’t wait and be another statistic on Rathmanner’s study of students not saving money each month or even knowing how to save. Whatever change you have, save it, and it will make you more change. Start today.