A College Student’s and Graduate’s Guide to Investments and Retirement Saving

The term “investment” refers to any strategy where you set aside money (or another asset) to allow it to accrue value over time. Investments should be made as soon as possible to ensure the biggest growth, especially in the case of retirement savings. 

However, many young people are hesitant to jump into the world of investments. A 2018 Gallup poll found that only 37% of adults under the age of 35 had money invested in the stock market compared to 52% in 2006. This increased wariness among younger adults could be attributed to a combination of inexperience and uncertain financial circumstances. That being said, it is important to learn about investing as early as possible so that you can gain that valuable experience. 

Why Should College Students and Graduates Think About Investments and Retirement?

In addition to the experience early investing can give you, investing during young adulthood can give your finances more time to grow. This is particularly important for things like retirement investments, which often feature relatively low-interest rates, and therefore require more time to build. 

How Do You Get Started in Investments?

When you start investing, it is important to do so with a plan. Think about what your long-term financial goals are, and work from there. You might also start with secure, low-risk investments. 

Plan for Investing

Some basic information that any new investor should understand includes the following:

• Where does the money earned from investing come from? Your investments will typically gain value from company earnings that are passed down to you. 
• How much should you invest? The rule of thumb is that you should invest about 15% of your income. 
• How do you choose an investment? Review your assets, determine your risk tolerance, and consider your short and long-term financial goals. 
• How many investments can you have? You can have as many investments as you want, but when you are starting, it is best to focus on a small number of investments. 

If you are still uncertain about how to proceed, it could be helpful to schedule a consultation with a financial advisor to get you started.

What Types of Investments Are There?

The following are some of the most common types of investment:

• Stocks: A stock is a fraction of ownership in a company. 
• Mutual Funds: This is a managed pool of money from various investors that is used to buy stocks, bonds, and other securities.
• Index Funds: This is a type of mutual fund or exchange-traded fund that is built to mirror a segment of the financial market, such as the DOW Jones. 
• Exchange-Traded Funds (ETFs): This is a grouping of securities that are traded through a stock exchange. 
• Target-Date Funds: This type of investment is built to be more high-risk early on, and eventually become lower-risk as it approaches the target date. These are usually used for retirement funds, and often take the form of mutual funds or collective trust funds. 
• Bonds: A bond is essentially a loan that you provide to a corporation or government body that they are required to pay back with a fixed rate of interest. 
• Certificates of Deposit (CDs): With a certificate of deposit, you agree to deposit a sum of money with the financial institution over a specific period, during which you will earn a fixed rate of interest. 
• Cryptocurrency: Cryptocurrency is a type of virtual currency secured by cryptography that is not managed by a central authority, such as governments or financial institutions. Cryptocurrency investments can offer highly flexible options. 

Before you pursue any of these investment opportunities, it is important to shop around and ensure that you are getting the best deal possible. 

Good Places to Start Investing

A few options that can be valuable for beginning investors include:

• Online Brokers: A broker is a professional who can provide consulting and management services related to stock investments. Online brokers can be particularly accessible. 
• Robo-Advisors: These are automated systems that analyze information about the investor to provide financial advice to the client. It may even automatically start and manage investments that are best suited for the clients’ needs based on an algorithm.
• Micro-Investing: This is the practice of investing small amounts of money, such as spare change. There are many easy-to-use platforms such as mobile apps that can help you get started with micro-investing.

In general, it is best to start small and seek out guidance when you begin investing to make sure that you start on the right foot. 

What Are the Most Popular Investments for College Students and Graduates?

Popular investment options among college students include:

• Cryptocurrency: Cryptocurrency is a virtual currency secured by cryptography that is not managed by a central authority, such as governments or financial institutions. While cryptocurrency is increasingly popular among investors, it is important to keep in mind that not all cryptocurrencies are equally reliable. Therefore, it is important to do your research before investing and diversifying your investments in cryptocurrency. 
• High-Yield Savings Account Or CDs: Savings accounts and CDs are highly-accessible and low-risk investments that you can open with your bank or credit union. However, compared to a standard savings account, high-yield savings accounts and CDs often have more limitations on withdrawals in exchange for their high-interest rates. 
• S&P 500 Index Fund: This is a mutual fund or exchange-traded fund that mirrors the Standard and Poor’s 500 Index. This is a highly popular index, and therefore funds that mirror it are operating under an evidence-based investment strategy.

Ideally, new investors should choose low-risk investment options, and use management tools to help them get started. Many young people have found that certain investing apps help introduce them to the world of investing by enabling them to manage their investments in a centralized location. The next step will be to diversify your investment portfolio. 

Taxes on Investments

The tax that you will have to pay on your investments will depend on the type of income that the investment is categorized as. Some notable types of investment income are:

• Tax-exempt: This means that you don’t need to pay taxes on the interest you earn. Municipal bonds are typically tax-exempt. 
• Ordinary: This is income that is taxed at your standard rate. Income from interest or rent is typically taxed this way. 
• Capital gain: Capital gain is the value that you receive from selling an investment at an appreciated value. Such income will then be subject to a capital gains tax, which will be 0%, 15%, or 20% depending on your taxable income for that year. However, you typically will only have to pay this tax if you have held the asset for over a year. 
• Tax-deferred: Tax-deferred income is taxed at a later date, typically when you withdraw the funds. This is typical of investments such as retirement plans. 

If you are uncertain how your investment income is categorized, it may be helpful to seek the assistance of a tax professional. 

How Do You Get Started in Retirement Planning?

Retirement investments are one of the most popular and valuable types of investments, as it is meant as a financial safety net for when you retire. These types of investments are also often very accessible and manageable, as there are many low-risk options, as well as opportunities to invest through your employer. 

Planning for Retirement

The following information is important to understand before you get started with retirement investments:

• How much should I save? You should save approximately 10-15% of your income for retirement. 
• How do you choose a retirement plan? Review your income, set a long-term goal, and check what options are available to you. 
• How many retirement plans can you have? You can have as many retirement plans as you want. However, you cannot exceed your contribution limits for the year.

A good place to start will be to check whether there are any retirement plans available to you through your employer. 

What Types of Retirement Plans Are There?

Two of the most common types of retirement plans are 401(k)s and IRAs. The major difference between the two is that a 401(k) is a retirement plan sponsored by your employer, while an IRA is an account that you set up independently. However, there are many options for retirement plans, including:

• Employer-Sponsored Retirement Plans: This is a type of retirement plan offered as a benefit through your employer. 
• 401(k) Plans: This is a type of employer-sponsored retirement plan that is drawn from your paycheck and often matched by the employer. 
• Roth 401(k) Plans: A Roth 401(k) plan is very similar to a traditional 401(k) plan, except for the fact that the contributions are made after taxes rather than before. 
• 403(b) Plans: This is a tax-advantaged plan that is available to certain entities such as public schools and some nonprofit organizations. 
• 457(b) Plans: This is a tax-advantaged plan that is available for employees of state and local governments, as well as employees of certain nonprofit organizations.
• Simple IRA Plans: This is an employer-sponsored plan used by small businesses. 
• Defined Benefit Plans: This is an employer-sponsored plan in which the benefits are based on a defined set of factors, such as salary and duration of employment. 
• Thrift Savings Plans: This is a defined-contribution plan for federal employees and members of the uniformed services. 
• Profit-Sharing Plans: With this plan, employees accrue benefits by sharing in the profits of their company. 
• Employee Stock Ownership Plans: Through this plan, employees are provided with stock in the company.
• Pension Plans: Through this type of plan, companies pay a defined amount to employees for life after retirement. 
• Cash-Balance Plans: This is similar to a traditional pension plan, except that an individual account is created for each employee with a lump sum. 
• Nonqualified Deferred Compensation Plans: Through this type of plan, an employee can defer some of their pay until retirement. 
• IRA Plans: This is a tax-advantaged personal savings plan. 
• Roth IRA: This is similar to a traditional IRA, except contributions are not tax-deductible in exchange for tax-free withdrawals during retirement. 
• CryptoIRA: A cryptoIRA is just like any IRA, except you invest cryptocurrency. You can fund a cryptoIRA by rolling over or transferring another existing retirement plan. 
• Solo 401(k) Plans: This is a type of retirement plan available for self-employed workers, as well as for businesses that don’t have any full-time employees. 
• SEP Plans: This type of plan allows employers to make contributions to employees’ individual IRA plans. 
• Payroll Deduction Plans: Contributions are made through payroll deductions. 

It is also important to note that it is sometimes possible to amend the terms of your plan or roll over your plan into a different type of account. 

Taxes on Retirement Accounts

Many retirement contributions are taxed at your typical income tax rate. However, whether you are taxed during deposit or withdrawal will depend on the type of plan. Meanwhile, certain plans may be tax-advantaged, tax-deferred, or tax-exempt. As such, it is important to take the parameters of taxation into account when you are choosing a retirement plan. 

Additional Investment Resources

The following are additional resources that can assist you with investment planning and management:

• Best Investment Apps of 2022: This is a list of popular investment apps published by CNBC.
• Investor.gov: This is a range of online investment resources provided by the federal government. 
• The Beginner’s Guide to Micro-Investing for New Investors: This guide explains what micro-investing is and describes its benefits and limitations. 

Additional Retirement Resources

The following are additional resources that can assist you with financial planning and management for retirement:

• Retirement (USA.gov): This is a comprehensive resource for information and tools related to retirement.
• Retirement (AARP): This is a comprehensive resource for retirement information.
• Best Retirement Planning Tools and Software: This is a list of digital tools that can help you plan for retirement. 

Additional Financial Literacy Resources

The following are additional resources that can improve your general financial literacy:

• Financial Terms Glossary: This is a glossary of basic financial terms and definitions published by the U.S. federal government. 
• Financial Education Resources: This is a document published by the U.S. Treasury Department that links to financial education initiatives for various age levels and personal circumstances. 
• 9 Financial Literacy Apps for People of All Ages: This is a list of helpful apps for gaining financial literacy that is helpful for people of different ages and experience levels.