Saving for Retirement in College: Why Starting Young Is Your Greatest Advantage

In this article, we’ll explain why saving in college is essential, what retirement accounts are, how they work, and how much you should set aside.

Why It’s Important to Start Saving Early

Although it might not seem like a big deal today, in college (or even earlier), you should start saving for retirement for several reasons.

Compound Interest’s Power

Compound interest is “interest on interest.” Basically, it’s the interest you earn on your principal (initial amount) plus the interest you’ve accumulated from previous periods. As a college student, this can work both for and against you. It’s all about time if you want it to work for you.

For example:

• If you invest $100 a month starting at age 20, you will have over $500,000 by 65—assuming a 7 percent average return.
• However, if you wait until 30, you’ll only have about $250,000—half as much—despite investing for 10 fewer years.

Simply put, you can reach the same goal with less effort the earlier you start.

Small Deposits Go a Long Way

It doesn’t matter how much cash you have to get started. Over time, even $25–$50 a month can build up into a meaningful nest egg. It’s like planting a seed. After a while, it will grow into a tree that will provide shade and security.

Building Lifelong Habits

It’s not just about the money when it comes to saving for retirement in college. It’s also about discipline. You’ll be more likely to stick to your savings plan after graduation if you practice setting aside a portion of your income now. Often, when habits are formed early, they stick.

Protecting Yourself From the Future

The cost of living will increase as you get older. Healthcare will become more expensive. Social Security may no longer be as reliable as it once was. However, the sooner you start saving, the better your chances are of surviving inflation and uncertainty.

If You Have Money in Retirement Accounts, You Can Access It

Having unpredictable income can make saving money for decades seem terrifying. Fortunately, retirement accounts are not totally untouchable.

• Early withdrawal penalties. If you withdraw before age 59½, you usually have to pay a 10 percent penalty.
• Exceptions exist. There are times when you can avoid penalties, such as when you pay for higher education expenses, cover medical bills, purchase your first home, pay insurance premiums following an unemployment loss, or even when a federal disaster is declared.

As a result of that flexibility, your retirement savings aren’t as “sealed off” as you might think. Despite this, it’s best to leave the money alone to grow.

What Is a Retirement Account?

Retirement accounts are special types of savings and investment accounts that encourage long-term investing. The big advantage? Tax benefits.

In general, you’ll run into the following types:

• 401(k). Employers offer these plans. In many cases, your employer matches your contributions. Essentially, this amounts to free money.
• Traditional Individual Retirement Account (IRA). As a result of making pre-tax contributions, your current taxable income is lowered. When you withdraw your retirement funds, you will have to pay taxes.
• Roth IRA. The money you contribute is after-tax. What’s the trade-off? In retirement, you’re not taxed on your withdrawals.

Roth IRAs make the most sense for most college students. Paying taxes up front is relatively painless, as you’re likely in a low tax bracket. In the future, when your income is higher, you can withdraw money tax-free.

A custodial IRA can be opened on your behalf by your parents or guardians if you are under the age of 18. This is tied to your Social Security number, but they control it until you turn 18–21, depending on the state you live in.

How Do Retirement Accounts Work?

A retirement account is similar to a greenhouse:

• You contribute money. Contributions can be made through payroll deductions (401(k)s) or direct deposit (IRAs).
• Your money is invested. You can buy stocks, bonds, exchange-traded funds (ETFs), or mutual funds.
• It grows over time. As the market rises and compounds, your balance increases year after year.
• You leave it alone. Ideally, withdrawals should be discouraged before age 59½ to maximize growth.
• You withdraw in retirement. A Roth IRA withdrawal is tax-free, while IRA withdrawals from traditional accounts and 401(k)s are taxable.

You can grow your seeds (contributions) in the greenhouse until they grow into something much larger (your retirement savings).

Innovative Ways for College Students to Start Saving

Even if your budget is tight, there are easy, low-cost ways to get started:

Take Advantage of High-Yield Savings Accounts and Certificates of Deposit (CDs)

This is an excellent option for short-term money without risk. You can withdraw money from savings accounts at any time, while CDs lock in your money at a fixed interest rate for months or years. You can use them to save for tuition or other near-term expenses.

Find a Low-Cost Online Broker

Typically, you can invest with zero trading commissions and no minimums at platforms such as Fidelity, Charles Schwab, Robinhood, or Webull. As a result, you get to keep more of what you earn.

Make Small, Consistent Investments

Fractional shares allow you to invest as little as $20 or $30 per month. When you start investing, consistency matters more than size. The reason? It establishes a habit and helps you build your savings.

Invest in an S&P 500 Index Fund

Want to avoid picking stocks? Investing in index funds is simple, low-cost, and diversified. Warren Buffett recommends the S&P 500 fund and invests in hundreds of top companies in the United States.

Take a Look at Robo-Advisors

A platform like Betterment or Wealthfront manages your portfolio for you based on your goals. Often, fees are around 0.25 percent per year, and you can start with as little as $20.

Discover User-Friendly Investing Apps for Beginners

With apps like Stash and Acorns, you can dip your toe into investing easily and automatically. Stash lets you start with $5, while Acorns rounds up your purchases and invests the change.

In addition, Acorns Later offers Roth and Traditional IRA investment platforms that help users save for retirement. Aside from offering age-specific investment portfolios, recurring deposits, and paycheck splitting to help manage retirement savings, it also offers potential tax benefits.

Get a Head Start on Your IRA

You can open an IRA if you’re working, whether part-time or during the summer. Roth IRAs are typically the best choice for students. When you contribute early, you will benefit from decades of tax-free growth.

How Much Should You Invest in College?

You need to consider your income and expenses, but here are some guidelines:

• Ideal. If you can, save 10–15 percent of your income.
• If money is tight. Even $25 a month is worth it. That’s one or two nights of not ordering pizza.
• As you earn more. Maintain a steady increase in contributions.

The math works like this:

• $50 per month from age 20–65: about $220,000
• $200 per month from age 25–65: about $530,000
• $200 per month from age 20–65: over $880,000

In the end, it’s time that matters more than money, which highlights the importance of starting early.

Final Thoughts

When you’re still figuring out finals, roommates, and what comes after graduation, retirement may seem distant. However, that’s exactly why you should start in college. When you start early, your money has more time to grow, and you’ll be less stressed financially later on.

By Deanna Ritchie

The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. NTD does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. NTD holds no liability for the accuracy or timeliness of the information provided.