If you’re a college student, saving for your retirement probably doesn’t sound all that exciting – in fact, if you’re like most college students, the extent of most of your planning is focused only a week or two ahead.  After all, it’s hard to think about life 40 or 50 years from now, but assuming you’re going to be around then, it would be nice to be financially sound.

After reading Ch. 3 you know that the earlier you start to save, the more you will have when you retire – that’s owing to the time value of money and compounding – of course, it also assumes you make money on your investments – but over time, stocks have done quite well.  The Wall Street Journal article “Roth IRAs for Teens” suggests that you set up a Roth IRA, which we describe in Ch. 16, to help you start to save.  Under a Roth IRA, your money goes in after-tax, and then grows tax- free, and when it is withdrawn incurs no taxes at all.  One nice thing about paying taxes on your earnings today is that if you’re like most college students, you’re probably in as low a tax bracket as you will ever be in, so you might as well pay taxes on it now rather than later.  Also, you can invest as much as you earned (not including investment returns) up to $5,000.  One neat thing about the Roth IRA is that even if you spend all your summer earnings, if someone gifts you some money, you can put that money into your Roth IRA – in effect, it doesn’t matter where the money comes from (a gift from a grandmother, or your wages), as long as it is less than $5,000 and isn’t more than what you earned that year.

Right now you may be asking yourself “Why should I worry about retirement, after all, there is Social Security, right?”  Well, today, we do have a strong Social Security system, but what will it be like in 50 years?  Given the debt problems the U.S. is facing right now, that’s a good question.  The same day as the Roth IRA article in The Wall Street Journal, there was an article titled “Discounting Social Security” that focused on a financial planner in Michigan who doesn’t even include Social Security benefits in retirement planning for his clients in their 30s, and discounts Social Security benefits heavily for his older clients.

The bottom line here is that it is your responsibility to make sure that when you retire, your retirement lives up to your expectations, and that takes financial planning.

General Discussion Questions:

1. Do you think Social Security will be around when you are ready to retire?
2. What changes do you think there might be in Social Security when you retire?
3. Why does a Roth IRA make more sense if you think your tax rate will go up in the future?

From Ch. 3:

1. If you deposit $5,000 today into an account earning an 11% annual rate of return, what would your account be worth in 40 years (assuming no further deposits)? In 50 years?
2. In the question above, what would happen if you only earned 7% per year?