Financial planning now can insure students will have cash in the future

With economics exams, part-time jobs and parties to attend, many college students don’t put financial planning at the top of their priority lists.

Buying new cars tops that list more often, said Peggy Davidson, investment planner at FirstMerit Bank.

“But they need to worry about tomorrow,” she said.

Many young professionals are going to want to retire someday, and it’s important to have more than Social Security waiting for them, according to the U.S. Social Security Web site.

The site says Social Security isn’t meant to replace income but to supplement it.

In fact, someone who makes $50,000 a year for 40 years will receive $1,000 a month (not factoring in inflation) from Social Security.

That is, if it’s still around.

“They say by around 2050 (Social Security) is going to be gone,” said Ken Hierholzer, investment manager at Charter One Bank in the Akron area.

He said it’s important for young people to have a retirement plan that doesn’t rely on social security alone.

IRAs

Individual Retirement Accounts (IRAs) are investment accounts, or shells, that house other types of investments, such as CDs, stocks, bonds and mutual funds.

The purpose of keeping investments in IRAs is to avoid taxes. IRAs are tax-deferred retirement plans, which means the investor doesn’t have to pay taxes on the money in the IRA until he or she withdraws the cash. The earliest someone can withdraw from an IRA without penalty is when the person is 59 1/2 years old.

“If you are certain you will have a good job for the rest of your life, you should do an IRA,” said Gene Hamby, an in-house money manager.

But he said it’s hard to predict how life will turn out, and young people should not put all their savings into an IRA.

“Life happens,” Hamby said. “If you need to cash it out because of unemployment or divorce, you will get hit with a 10 percent penalty.”

Because IRAs are tax-deferred, the IRS has a fixed 10 percent penalty on all early withdraws.

Annuities

Similar to IRAs, annuities are tax-deferred retirement plans that contain other forms of investments.

However, the experts agree that annuities are not for young and financially challenged investors.

They recommend students invest in CDs, mutual funds or stocks alone or an IRA as opposed to getting into an annuity plan.

Hamby said annuities are either for the extremely wealthy or elderly people who want to live on a fixed income. There is a 10 percent penalty on annuities if they are withdrawn before maturity, similar to an IRA.

401 (k)s

Another retirement fund that is tax-deferred is a 401 (k) plan. It is offered through many employers, and funds are taken from the employee’s paycheck and put into the 401 (k). Often, employers will match contributions the employee makes.

If the employee doesn’t stay at the job 40 years, as so many don’t these days, the 401 (k) can rollover into an IRA, and the employee will not have to pay early withdrawal penalties.

Investing now is key to having a secure retirement later, Hamby said.

In Hamby’s words, “You’d be stupid not to.”

Contact student finance reporter Katie Greenwald at [email protected].