Saving for Retirement as a Young Professional

Saving up money for retirement is one of the most important financial commitments that you can make in life, as you may need to establish hundreds of thousands of dollars worth of resources before leaving the workforce. As a young professional, who is fresh out of college, the choices between stocks, bonds, mutual funds, and retirement accounts can be especially daunting. To best organize the retirement planning process, you must first outline a list of well-defined goals. From there, you can best select the right types of accounts and investments in which to set money aside. Remember, time is on your side, as a young professional.

Identify Retirement Lifestyle

Goals for your retirement lifestyle provide a sense of purpose for your financial plan. Perhaps you dream of a Southern California retirement -- with a Pacific Coast Highway home, movie premiers, and daily rounds of golf. With a list of goals in hand, you can pull up an online retirement calculator and toggle through projections. After using the retirement calculator, you can estimate the amount that you should be saving each month at a projected rate of return to achieve your preferred retirement lifestyle. As a young professional, you stand to benefit tremendously from long-term compound returns: a $250 monthly investment that earns a 10 percent annual return grows into more than $1.5 million after 40 years.

Young Professional Cash Management Strategy

Effective cash management strategy marks the foundation for your retirement plan. You should eliminate discretionary spending from your budget altogether, if you are having trouble paying bills and meeting your financial goals. Discretionary spending goes to procure consumer items, such as, concert tickets and designer jeans, which are not necessary for survival and do not add value to your bottom line. With your spending under control, you can take steps to pay down expensive credit card debt, purchase health and disability insurance, and lastly, establish six months worth of living expenses in cash reserves. With a good cash management strategy, you can access cash in multiple scenarios, without being forced to take withdrawals from your retirement accounts.

Young Professional Retirement Accounts

All retirement accounts feature tax deferral. Tax deferral means that you will not owe taxes on dividend payments, interest income, and capital gains, as they occur within your retirement account. As a young saver, you should make it a priority to put money into 401(k) and Roth IRA retirement accounts. 401(k) plans allow for tax-deductible contributions, but your retirement withdrawals will be taxed at ordinary income rates. With the 401(k) plan, you should take care to maximize your employer match as free money. As part of your benefits' package, your employer will match your contributions on a dollar-for-dollar basis, up until a certain point.

Alternatively, Roth IRA contributions are made with after-tax money, which allows for tax-free withdrawals. A Roth IRA is therefore ideal for a young professional -- who expects to retire within a higher tax bracket. For the 2010 tax year, you are limited to $16,500 and $5,000 in annual contributions into 401(k) and Roth IRA accounts, respectively.

Warning

You generally cannot make a retirement account withdrawal until age 59 ½ -- without a 10 percent additional tax penalty. The IRS will make an exemption to the penalty tax rule, in case of disability. Be advised, however, that the IRS defines disability as a permanent condition that makes it impossible for you to hold down any job.

Young Professional Investment Strategy

As a young professional, you should be putting most, if not, all of your money into stocks. Although stocks can be volatile from year-to-year, your youth affords you with plenty of time to recover from losses. As a measure of U.S. stock market performance, the S&P 500 Index has averaged 11 percent annual returns since its 1957 inception. The S&P 500 tracks large capitalization stocks, such as Exxon and Wal-Mart. In addition to U.S. large capitalization stocks, you may also consider small capitalization and international stocks to invest aggressively as a young saver. For diversification and professional money management, it is a good idea to invest cash through mutual funds. Each mutual fund share carries rights over a larger asset pool of multiple securities.

Saving for Retirement as a Young Professional, Sources:

IRS: Roth IRAs

IRS: 401(k) Plans

Bankrate.com: Calculators

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Buying Stocks: Dividend Reinvestment Plans (DRIPs)

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