What’s a good retirement investment strategy for a college grad?

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Flimv0r

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My daughter just graduated college this year—woohoo! She's stepped into the adult world and started her first full-time job.

Her starting salary is decent for an entry-level position, but she lives in a high-cost-of-living city, so making ends meet will be a challenge. She's very disciplined with her money, though. She’s created a weekly budget that she’s sticking to and is setting aside a portion of her income to build an emergency fund. On top of that, she’s putting $50 a week into a savings account for short- to medium-term goals.

Her employer offers a 401(k) plan with a partial match—50 cents for every dollar she contributes, up to 1.5% of her salary. It’s not the best match out there, but hey, it’s better than nothing.

She’s decided to put $200 a month into her 401(k), which works out to about 5% of her income. I’ve read some advice suggesting that it’s better to contribute just enough to get the full company match and then invest anything extra in a Roth IRA or other types of accounts.

Numbers aren’t my strong suit, so I’m curious—what’s your take on this?
 
As long as she’s putting money aside in some form, she’s already off to a good start. My advice would be to contribute enough to the 401(k) to get the full company match, then focus on building up her emergency savings. If her company offers a Roth 401(k), that might be a smart option since she’s currently in the 12% tax bracket.

There are different views on what to do if she has extra money to save beyond the match. Personally, at her age and income level, I’d lean toward opening a Roth IRA.
 
Flimv0r said:
I’ve read some advice suggesting that it’s better to contribute just enough to get the full company match and then invest anything extra in a Roth IRA or other types of accounts.
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The general advice seems to be to contribute at least enough to get the full company match. If the investment options in the company 401(k) aren’t great, she might want to consider putting any extra savings into something else. Ideally, the plan should offer low-cost index funds, like S&P 500 or total stock market funds.

As her investments grow, it would make sense to add a total bond market fund for balance. ETFs are becoming more popular and might be a better option than traditional mutual funds, though that’s not the top priority right now.

Oh, and a Roth account is definitely a solid choice!
 
Here’s the plan I set up for our first kid when they got their first job:
  • Put 6% of their income into a pre-tax 401(k) to get the full company match, all invested in an S&P 500 index fund.
  • Use any extra savings to fund a Roth IRA, also in an S&P 500 index fund.
  • Keep $2,000 in a savings account at a local bank and at least $1,000 in their checking account.
  • Park $2,000 in a Vanguard Settlement Fund (Federal Money Market) in a brokerage account.
  • Any additional savings? Prioritize Roth contributions and continue investing in the S&P 500 index.
  • Increase their 401(k) contribution by 1% every time they get a raise.
The biggest challenge is building a saving mindset early on, especially with how expensive life can be. Someone earning $52,000 a year won’t have much room to save, and that’s perfectly fine. For context, Kid1 started at $62,500 with a $15,000 sign-on bonus after 90 days—definitely a strong start!
 
It’s hard to believe, but $52K doesn’t go as far as it used to. Especially when you realize you can make close to $40K a year working at a gas station ($19.75 an hour).

I really feel for new graduates these days. Rent prices are through the roof, and groceries aren’t cheap either. Honestly, if they’re able to save anything at all, they’re already ahead of the game.

My advice might not be exciting, but here it is: Stay with your parents if that’s an option. Focus on ways to boost your income. And save as much as you possibly can.
 
Share a chart with them that highlights how starting to invest in your 20s compared to your 30s can dramatically impact long-term growth, thanks to the power of compounding.
 
What led her to settle in such an expensive city? Was it the job that brought her there? Is her career field mostly tied to high-cost-of-living areas?
 
It’s awesome that she’s getting an early start. Having time on her side is key for long-term success, and that’s something that helped me bounce back from plenty of mistakes. I’d definitely recommend going with a Roth 401(k), and putting any extra money into a Roth IRA. The tax savings down the road will be well worth not having the deductions now. After that, she could consider a target date fund or go all-in with stocks at this stage. You’re doing a great job as a parent, setting her up for financial freedom!
 
Our son just graduated. With each paycheck, he puts money into his 401(k) and a money market account to build up an emergency fund. He also started a Roth IRA to begin the 5-year clock and has been able to contribute to it for the past two years. He follows a budget and is continuing to learn more about how taxes work.
 
I’d recommend she contribute enough to get the full match and invest entirely in stocks, but honestly, her main priority should be moving out of an expensive area with that salary. That will have a much bigger impact on her financial well-being than how she invests. Also, I wouldn’t support her financially—she needs to understand that she can’t afford to live that kind of lifestyle on her current income.
 
Blorz!n7 said:
Share a chart with them that highlights how starting to invest in your 20s compared to your 30s can dramatically impact long-term growth, thanks to the power of compounding.
Click to expand...
I’m sure every Boglehead has that sorted out for each kid by the time they’re 2, at the latest
 
Saving through her workplace plan is a great option. It’s automatic and easy, and she probably won’t even notice the money being taken out. Saving outside of that, like in a Roth, is tough with her income level.
 
Definitely take advantage of the company match, but as someone else mentioned, saving in a 401(k) is simple and automatic. People don’t miss the money when it’s deducted from their paycheck without them having to think about it.
If possible, have her invest in an S&P 500 index or a total stock market index, but make sure she understands there will be losses when the market drops. Maybe consider a bond index fund to help cushion the blow from stock market declines.

I’d recommend a 50/50 split between stocks and bonds until she’s experienced a rough market downturn. If she’s comfortable with the losses, she can gradually shift to a higher percentage of stocks, like 60/40 or more. It really depends on her comfort level.
 
If she can maintain her current frugal habits and invest most of any future pay raises, she’ll set herself up for a smoother financial future. Starting to max out her retirement contributions early, especially in her first decade of earning, makes a huge difference compared to waiting until she’s 40 to start saving for retirement. Saving the extra money from pay raises is easy—just increase the contributions right away so she never notices the extra money in her paycheck. The challenge is that her friends might be splurging on new cars or taking on big mortgages.

By the way, Consumer Reports has a great list of reliable used cars.
 
Thanks everyone for your wise advice. I think she’s taking a smart approach for now, and I’m thankful she’s thinking things through so well.
 
At her age, she probably has several other financial goals, such as:

  1. Building an emergency fund
  2. Saving for a new car when hers eventually wears out
  3. Setting aside money for a future move, since paying first and last month’s rent can be a significant cost
  4. Maintaining a healthy work-life balance. She’s young, single, healthy, and without kids yet, so there are plenty of opportunities to do things now that might be harder, or even impossible, later on. When I was in my late 20s, I had trouble spending money on things like travel, so I set up an automatic transfer of 1-2% of my paycheck into a separate account for “fun money.” I didn’t have a strict budget, but that money was clearly set aside for personal enjoyment, like affordable trips.
It’s okay for her to start slow with retirement savings, but contributing enough to get the company match is definitely worth it. More importantly, it helps her build a saving habit, so she should at least do that.

I was a bit older than her, but at one point, I decided to save half of any future salary increases, and I stuck with it for years. If she can do the same, by the time she’s in her 30s, she’ll be saving a great portion of her income. Keep in mind, saving won’t just be for retirement; she’ll likely have other financial goals to save for as well.

Flimv0r said:
I’ve read some advice suggesting that it’s better to contribute just enough to get the full company match and then invest anything extra in a Roth IRA or other types of accounts.
Click to expand...
For retirement savings, a deductible IRA or 401(k) would likely be a better option for her. The reason is that single people tend to move into higher tax brackets quickly, while married couples can enjoy lower tax brackets. For example, a married couple can have over $100K in taxable income and still be in the 12% federal tax bracket.
 
My advice is to keep it simple. A 401(k) with payroll deductions is great because it’s automatic and easy. Starting with 5% is a solid choice, but encourage her to bump that up whenever she gets a raise.

What really matters is how much she saves and being consistent with it.
 
Ploxir said:
My advice is to keep it simple. A 401(k) with payroll deductions is great because it’s automatic and easy. Starting with 5% is a solid choice, but encourage her to bump that up whenever she gets a raise.

What really matters is how much she saves and being consistent with it.
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Well put. I totally agree.
 
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