NCPA - National Center for Policy Analysis


June 16, 2009

Now is the time for new college graduates to get a savings plan under way, says Pamela Villarreal, a senior policy analyst with the National Center for Policy Analysis.  For a comfortable retirement, new graduates should participate in a 401(k) plan at work and set up an Individual Retirement Account (IRA).

The Pension Protection Act of 2006 is very helpful for getting new graduates to begin saving for their retirement, says Villarreal:

  • Companies are allowed to automatically enroll employees into a 401(k) workplace pension plan and any employer who opts to do that must match employee contributions, following a formula set up in the act.
  • Employees start with a minimum contribution mandated by the act and employees who fail to take advantage of the employer contribution are in effect turning down a pay raise.
  • On top of that, the law allows an employer without a 401(k) plan to make payroll deductions into an employee's IRA as long as all employees are included.

According to Villarreal:

  • In 2005, only 3.2 percent of workers aged 21 to 24 owned an IRA and only 9.3 percent participated in a 401(k) pension plan.
  • Among workers aged 25 to 34 only 15 percent owned IRAs and only 28.6 percent participated in a 401(k).

Delay is costly, she says.  Under current law, today's 21-year-old will not be eligible for Social Security until age 67.  It's easy to put off saving for retirement because the view is there's plenty of time.  But procrastination can significantly reduce potential retirement savings.  A 25-year-old who waits 10 years to save is forgoing a decade's worth of compounding.  Regularly setting aside a little bit of money early in one's career produces a greater nest egg than setting aside a larger amount later on.

For example:

  • A 25-year-old who puts away $100 a month for 40 years at a 7 percent nominal interest rate will have more than $260,000 by age 65.
  • But if that person waits until age 45, doubling the monthly contribution to $200, he or she will have only $104,000 by age 65.

Source: Cliff Pletschet, "Retirement planning at graduation," San Jose Mercury News, June 16, 2009.

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