I opened an IRA as an undergraduate, at my mother’s urging. I worked 40 hours each week in a restaurant and went to school full-time. I didn’t have much money left after car insurance, gas, and coffee to keep me going. When Mom said, “You really need to open an IRA and contribute as much as you can” I thought “what’s an IRA” and “the most I can contribute is zero”. But, like most things Mom suggests, I did it and I’m glad I did.
Graduate students, if they work at all, do not earn much money. Most will probably respond to my urging with the same responses I gave to Mom. But, graduate students (and even undergrads) can, and I think should, begin establishing financial security and preparing for the future by opening an IRA. Here is my argument.
My goal is to explain why you need an IRA rather than describe the nitty gritty definitions and rules of an IRA. You can read the details of IRAs online but here are five key points to get you started:
1) An IRA is an Individual Retirement Account. The key word is Individual. An IRA has nothing to do with your employer. You establish it. You fund it. It’s yours. A retirement plan from an employer is typically a 401(k). This is different.
2) You can open an IRA through almost any financial institution. I prefer Vanguard because it is non-profit but Fidelity, T. Rowe Price, Charles Schwab, TDAmeritrade, and every other broker offers them.
3) They are free to open with no minimum.
4) There are two types of IRA, traditional and Roth. A Roth is better for most people for many reasons.
5) Invest in an S&P 500 index fund, such as Vanguard 500 Index Fund ETF (VOO) or target date fund.
Follow these steps and you will be on your way to a retirement that doesn’t resemble your graduate student situation of eating ramen over the sink while 3 roommates look on to see if you finish all the broth.
You don’t make much money. Here are some reasons why you should commit some of it to an IRA.
1) The best time to invest was yesterday. The next best time is today.
Take it from Albert Einstein who is credited with saying “compound interest is the most powerful force in the universe.” Benjamin Franklin described compound interest as "Money makes money. And the money that money makes, makes money." This means that money you invest sooner is worth exponentially more than money you invest later. Every $100 you invest now could be worth over $1900 in 30 years (assuming 10% annual return, you can fuss with the returns here). If you wait ten years, until you have a ‘real job’, or until you ‘get ahead’ 100 will be worth just $732. If you invest $100 per month for 30 years you would have $230,000. After twenty years you would have just $77,000. Forget sophisticated knowledge of stocks and market fluctuations. Time is your biggest investing advantage.
2) Learn about money and yourself.
Not many people get rich by working. A few people do but, guess what, you are probably not one of them. You are in graduate school, remember? You are not starring in a major motion picture or founding a wildly profitable, world-changing company (those folks also invest). So, assuming you will work for money you need to make some of that money work for you.
Starting an IRA is an easy way to start investing and begin learning the basics of personal finance and investing. At this point you probably need a budget to scrape together $100 per month. Budgeting is a skill worth learning. You may find that you like investing and learning how to make your hard-earned money produce easy-earned wealth. Financial education in this country is non-existent or else I would call it abysmal. Anything you learn will help you immensely. If you don’t learn anything, at least you will have a bunch of money.
3) Your financial future is uncertain.
The economy and job market barely recovered from the great recession in 2008 before the COVID pandemic walloped it again. If you don't graduate for 2 or 3 or 4 years there is no telling what the state of the job market and economy will be. There will always be jobs but maybe not the jobs or the location that you wanted. They may not pay what you expected. Thus, you may need to change jobs a couple times until you find a good fit.
All this is to say that your ‘plan’ to start saving once you have a real job may take longer than you think or may never materialize at all. How long can you go without a job after you graduate? Your contributions to a Roth IRA can be withdrawn without penalty in a financial crisis. So it is not only retirement security. A Roth provides life-long security for unexpected situations. This is about investing in yourself and paying yourself first. You will thank yourself later. I promise.
4) You may not have an employer retirement plan or social security.
The traditional concept of keeping a job for thirty years then retiring with a pension is largely over. Most employers are switching 401(k) type plans so you contribute, save, and eventually spend your own money. If you spend it all too soon, call your kids. Your former employer is not responsible. You better learn about personal finance and budgeting.
In case you haven't heard, social security is constantly on the brink. It is unlikely to disappear -it is the most politically popular public program- but benefits will be reduced. You will be responsible for a greater portion of your retirement income. The only way to make up for this is by saving and investing wisely, which means starting early.
On a positive note, there are more ways than ever to become a freelancer or an entrepreneur. These options are great for flexibility and personal satisfaction but they don’t come with a pension. With interest rates near zero (and even if they were 5%) a savings account is not going to cut it. Your money becomes less valuable by the day and the compounding you need doesn't happen. The only way to build wealth in this environment is the stock market. But wait, isn't that risky? The real risk is being destitute in retirement. Low-cost S&P 500 index funds require no knowledge and are low risk over the long term. That's another article.
5) Women face greater financial risk throughout life.
This is for the men because women already know that: Women typically earn less than men. Women are more likely to be single parents. Women are more likely to care for elder relatives. Women are more likely to take responsibility for running a household and raising kids. Women are more likely to work part -time or fulltime via several part-time jobs. Women are also more likely to temporarily leave the workforce throughout their careers because of the reasons above. All these burdens often require more flexible, but lower paying jobs.
This is for the women: Women are more likely to cede financial activities and planning to men. Women more frequently get screwed in divorce. Women are more likely to get stuck in unhealthy relationships because they can’t afford to leave. And, all those part time jobs don’t offer retirement plans. The best way to protect yourself, your goals, your career, and your children is to have money and a bit of financial savvy. Money provides flexibility and control. Money provides freedom.
In 2021, the maximum you can contribute to an IRA is $6000, that would be $500 per month, but anything you can contribute is a great start. (Investing $500 per month for 30 years could yield over $1.1 million.) Again, the hard part is starting and money invested now could grow 15 or 20 times in 30 years. Open an IRA and contribute $50 or $100 or even $10 per month to get going. You can have money taken directly from your paycheck or automatically withdrawn from your bank account. Passive saving is successful saving. Just like that streaming service you pay for but haven't watched in months, inertia will prevent you from cancelling your automatic investment once you start it. Most students (and people generally) have interests and priorities other than personal finance and saving for retirement. But, money should help you live the life you want which may not include working to 67 or even 57. The sooner money starts working for you the sooner you can stop working for money.
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