Saving for retirement as a graduate student is a topic that doesn’t get nearly the attention it deserves in higher education circles. There are surely many reasons for this, but whatever they are, the bottom line is that for graduate students, and Ph.D. students in particular, the opportunity cost of brushing retirement planning under the rug can be colossal in the long run. In fact, it can be more-than-a-million-dollars kind of colossal.
Allow me to explain. Depending on one’s field of study, Ph.D. programs can take anywhere from five to 10 years. But — and here’s the rub — these aren’t just any years. From the standpoint of retirement planning, there is hardly a better time to begin building one’s nest egg.
We can illustrate this point with an example. Say a student who hopes to retire at 67 puts away $6,000 at age 25. Assuming an average yearly rate of return of 10 percent — the average yearly S&P 500 return since its inception in 1926 — that $6,000 becomes a whopping $328,582 after 42 years.
But what if she decides instead to wait until after graduation at, for instance, age 32, to begin making contributions? Growing at the same average yearly rate of 10 percent, that same $6,000 leaves her with only $168,615 at 67. That’s roughly half of what it could have been had the student invested the principal amount a mere seven years sooner.
The lesson here is simple but powerful: all things being equal, more time in the market means exponentially greater returns. (I hasten to add the usual disclaimer that past performance is no guarantee of future returns.) That is why it’s so important for graduate students to begin saving for retirement as early as possible.
Now, in this hypothetical, we were simply comparing a one-time contribution of $6,000 at age 25 to a one-time contribution of the same amount at 32. But what if this student were to put away $6,000 in each of her seven years as a Ph.D. student? Assuming, for simplicity, that growth compounds once every year, here’s the arithmetic:
- Year 1: 6,000 x 1.1042= $328,582 at age 67
- Year 2: 6,000 x 1.1041= $298,711 at age 67
- Year 3: 6,000 x 1.1040= $271,556 at age 67
- Year 4: 6,000 x 1.1039= $246,869 at age 67
- Year 5: 6,000 x 1.1038= $224,426 at age 67
- Year 6: 6,000 x 1.1037= $204,024 at age 67
- Year 7: 6,000 x 1.1036= $185,476 at age 67
Summing these amounts up, we find that by not starting earlier, this student is potentially leaving more than $1.7 million in retirement savings on the table. Of course, this example is for illustration purposes only. Apart from there being no guarantees with respect to market performance, investors are usually advised to rebalance their portfolios as they age, which means that the rate of return typically decreases over time as the aim shifts from wealth generation to wealth preservation. But the broader point still stands: we’re talking about a decent amount of money.
My advice to graduate students, then, is to start as soon as possible. When it comes to saving, it’s never too late. And even if you can’t max out your Roth IRA every year, just do what you can, because every little bit matters.
But why $6,000 in particular? And what in the world is a Roth IRA? The details can be found elsewhere, but stripped to its basic elements, the Roth IRA is a special type of individual retirement account that, in 2021, had a maximum contribution limit of $6,000, or $7,000 for individuals over age 50 to help them “catch up.” Contributions grow tax-free and, more important, gains aren’t taxed when account holders begin taking distributions once they become eligible to do so after age 59½. Those features make the Roth IRA one of the best retirement-saving vehicles around, especially for those who expect to be in a higher tax bracket in retirement than when they made their contributions. Here’s hoping that’s true for all of us.
Planning for retirement is an imperative for everyone. But it is especially important for Ph.D. students, who are likely to spend many of their most consequential years, from a returns standpoint, without access to tax-advantaged employer-sponsored retirement plans like the 401(k) or the 403(b). Fortunately, the U. S. Congress recently took action to remedy this situation, and graduate students can now contribute income from their fellowship stipends to tax-advantaged retirement accounts like the Roth IRA.
My hope, then, is that graduate life offices will consider developing resources to help students plan and save for retirement or, at the very least, understand the stakes involved. If administrators don’t feel comfortable tackling this topic themselves, they can bring in financial professionals who can. They could even offer a whole personal finance series on information about related topics, such as how to balance saving for retirement with paying down debt while managing current expenses. Funds from student life fees could be allocated for programming of this kind.
But however graduate schools decide to address this topic, I hope it’s clear that this conversation is long overdue. We must make a start.