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TO: The Class of 2013
From: Alicia Munnell, Director, Center for Retirement Research
As you graduate and set off on your exciting journey, let me offer you some advice about the last thing on your mind—your retirement. Yours will not be as easy as your grandparents’, many of whom received lifetime benefits from pension plans as well as generous Social Security. But it will be easier than what your parents have to negotiate in a changing retirement landscape—reductions in Social Security and a shift from traditional pensions to 401(k) plans. Plus they got hit by the financial crisis.
Unlike your parents, you will know the rules of your retirement system from the first day you start work. It will consist of two parts—Social Security and 401(k) plans. Full Social Security benefits will be available at 67; higher benefits available at 70. Accumulations in your 401(k) plans will depend on how much you put in, how you invest your money, and how long you have it invested. In short, you are in a roll-your-own retirement world.
Here are four things to do so that, when you end the career you are just beginning, you will have enough money to enjoy yourself.
1. Plan on a long work life. Even if you retire at 70, you should have at least 20 years of retirement. And it should be easy to work for a long time because you have a wonderful education and will find fascinating things to do.
2. Remember Albert Einstein. He was right: “Compound interest is the eighth wonder of the world.” That means that you want to join your company’s 401(k) plan as soon as you can. Put in as much as you can and do not take it out—for a car or a vacation—when you change jobs.
3. Invest smart. Fees can eat up a lot of your investment returns. Paying an additional one percent can reduce your pile at retirement by 20 percent. Stick with index funds—funds that follow the broad market—as opposed to actively managed funds. You will minimize fees and come out way ahead.
4. Learn to value the Social Security program. It will be there for you, and you will appreciate what it provides when you retire. Benefits will not be as generous as they were for your grandparents or parents. But you can make up for the reduction by retiring later than they did.
Go forth and have a lovely life. Do good things and make yourself and those around you happy. And follow these four pieces of advice. You will thank me when you are 70.