Playing the investment game can be intimidating, but students need to start planning for their futures early, say business professors.
The problem is "most people our age don't really know much about [investing money]," said Tyler Weslowski, a UCF business major. "Sometimes you don't know how to ask without sounding ignorant. And sometimes we just worry more about our class on Monday."
There are many misconceptions about retirement, UCF finance professor Paul Gregg said. Don't depend on Social Security and a company pension for income, he stressed to students in his Personal Finance and Investment class. Although politicians are trying to revamp Social Security, he believes students need to make smart investments and not depend on the government for retirement income.
Another misconception, perhaps the biggest among students, is that there is plenty of time to start saving for retirement.
The best way is to begin now, Gregg said, and every little bit helps. A little money put away over a longer period of time gains much more interest. The concept is called the time value of money.
"If I learned anything, the dollar today is worth more than a dollar tomorrow," Weslowski said. "The sooner you start investing, the greater potential you have to gain."
Gregg gave three examples, all assuming a 9 percent compound interest rate, to show how money grows over time. Starting at age 25, a student could invest $300 a month and have about $1.4 million in a retirement fund at age 65. Wait until age 35, and you'll have about $550,000, Gregg said. Or wait until age 45, and you'll have about $200,000.
It seems simplistic, and anyone looking at the numbers can see saving early pays off. But there's more to it than just throwing money into an account and watching the numbers grow. Students need to understand where their money is going.
Weslowski invests a portion of every paycheck into his company's stocks, which it then matches. "Basically, I gave myself a raise for investing in their stock," Weslowski said.
Buying only one company's stock is a risk, Gregg cautioned, as he reflected on all the Enron employees who had only company stocks. "When Enron went under they lost big time," he said.
The smartest move is to spread out stocks among different companies. If one company hits dirt you have other investments to fall back on.
Weslowski acknowledges the risk and says he plans to invest more after he graduates college. "I'll go to an [investment] broker or someone I trust to help me out," he said.
President of the UCF student organization Financial Management Association Matthew Scott also thinks long term rather than short term. He invests in different stocks and wants to start investing in real estate.
His advice - "As a general rule, save at least 10 percent of your salary, in some form of a retirement account, through your employer," he said.
Pension plans are one option offered through an employer. There are two types of pension plans: defined contribution or defined benefit.
Defined contribution plans are individual accounts, with benefits based on the amount contributed, income, gains and losses. These plans are typically easier to understand and can be funded through payroll deductions.
Perhaps the most common plans are 401(k)s. Employees can make pre-tax contributions, which their employer can match. Earnings grow tax-deferred and reduce an employee's taxable income.
The second type of pension plans, defined benefit plans, promise a specific monthly benefit during retirement.
"Employers will pay employees a fixed amount per month based on your pre-retirement salary and number of years of service," Gregg said. But unlike defined contribution plans, employees are not required to make investment decisions.
"In the future, more responsibility for retirement savings will be placed on the individual," Gregg said. "So be ready."
Individual Retirement Accounts, another option, offer many incentives to save.
IRAs are also divided into two types: traditional IRAs and Roth IRAs. With a traditional IRA, money grows tax deferred. That means an investor doesn't pay taxes until he or she begins withdrawing money from the account.
But the biggest advantage of a Roth IRA is its tax exemption. Let's say you make $100,000 a year and set aside $4,000 in a Roth IRA. If you're in the 25 percent tax bracket, you'd pay $2,500 taxes up front on $100,000, but the money you set aside grows tax-free.
On the other hand, if you put the same amount into a traditional IRA, and it grows to $500,000, you would pay taxes on $500,000 instead. And in a 25 percent tax bracket, it comes out to a heftier sum - $125,000.
Both types of IRAs have advantages and disadvantages. Roth IRAs don't have a specific age requirement, whereas payouts on traditional IRAs must start by 70.5 years old. Because the money has to be put aside for a number of years, early withdrawal penalties may also apply.
Company pensions and IRAs, though more common, aren't the only options. With so many investment choices, choosing where to put money can be overwhelming. Gregg advises students to take a financial planning class or meet with a financial planner who can explain the ins and outs.
But by starting now, students prepare themselves for the future.
"College is a good time to start," Weslowski said. "It's the next step for becoming a true adult for a lot of students, and it's when you're supposed to be learning these life lessons."
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