Putting the Class of 2011 on the right financial track

With discipline and time, today's new grads can be tomorrow's millionaires

May 20, 2011|By Eileen Ambrose, The Baltimore Sun

Greetings, Class of 2011.

You have worked hard in college these past four years — five or six years for some of you — and are about to enter the real world.

That world, as "The Daily Show" host Jon Stewart told College of William & Mary graduates in 2004, is a little different than life on campus. "The biggest difference," Stewart told them, "is you will now be paying for things."

Indeed, finances will play a big role in your life from now on. Two-thirds of you leaving school with a bachelor's degree will be shouldering student loans. And you'll have to start repaying them before you know it.

One of your life's biggest financial goals — though you may not believe this now — must be saving for retirement. By the time you retire, there will be even fewer pensions than today and Social Security benefits will be stingier than what your grandparents now enjoy.

But the financial outlook is by no means bleak. The job market for new graduates remains challenging, but it's the best since the 2008 financial crisis.

And you have something priceless that your parents and grandparents don't have — time.

Start saving now, even small amounts, and it will pay big dividends down the road because your investments will have more years to grow. Even if you invest as little as $200 a month in a Roth IRA and earn an 8 percent annual return, you'll be a millionaire by the time you reach your full retirement age of 67.

Here are some suggestions to get you on a sound financial path:

Student loans Graduates who borrowed for college are carrying an average of $27,200 in student loan debt, calculates Mark Kantrowitz, publisher of financial aid sites FinAid.org and Fastweb.com.

Most of these loans are from the federal government, and you generally have to start repaying them six months after graduation. Uncle Sam offers a variety of repayment options to help struggling borrowers.

If federal loans eat up most of your paycheck, for instance, you may be eligible for an income-based repayment plan. Payments won't exceed 15 percent of discretionary income. And if your earnings are really paltry, you might not have to pay anything at all. Any debt remaining after 25 years is erased — or, after 10 years if you have been in public service for a decade.

If you can't find a job, you may be able to defer payments on federal loans for up to three years. Or you may qualify for a forbearance, where payments are suspended or temporarily reduced. Explore your options at studentaid.ed.gov.

You also might consider volunteering with AmeriCorps if you can't find other work, Kantrowitz says. The program offers education awards worth up to $5,550 a year that can be applied to reducing federal student loan debt, he says. Even if you volunteer only for the summer, the award is prorated.

Whatever you do, don't default. The penalties are harsh. And the government can garnishee wages, tax refunds and even Social Security benefits in retirement to collect its due.

Health insurance If you're fortunate, you will land a job that provides health care insurance.

If not, you can remain on your parents' workplace plan until you turn 26, thanks to health care reform.

Workers sometimes pay extra to cover dependents. This means that your parents might have to shell out more to keep you on their plan.

Not all parents are generous, though. A recent survey sponsored by online broker eHealthInsurance found that four out of 10 parents said they would keep an adult child on a health plan only if it didn't cost them anything. Tough love.

Another option is to buy an individual policy. Young adults are usually healthy, so the premiums on this policy can be cheaper than sticking with a parent's plan, says Carrie McLean, a consumer health insurance specialist with eHealthInsurance.

Still, if the costs are similar, young adults usually are better off with the parent's group plan because the benefits tend to be better, she says.

Retirement "Start saving for retirement immediately," says Stuart Ritter, a financial planner with T. Rowe Price in Baltimore.

Your employer likely will offer a 401(k) or a similar retirement plan. You contribute through payroll deductions before taxes have been taken out. Employers typically kick in some cash, too. You'll pay income taxes on the nest egg when you make withdrawals in retirement.

Or, if your employer doesn't offer a plan, open a Roth IRA. You contribute money that's already been taxed. But the big Roth benefit is that any investment growth won't be taxed in retirement.

To maintain your lifestyle in retirement, new grads should set aside 13 percent of gross pay each year, which includes any employer contribution, Ritter says.

If that's a struggle, start by saving 6 percent of pay and increase that by 2 percentage points a year until you reach your target, he says.

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