Take, for example, a hypothetical couple about to retire who have assets of just over $1 million. To help them, assume they have no children who are financially dependent on them. Also assume that they will be entitled to maximum Social Security benefits, which are just over $30,000 a year each (this year) for people who start collecting at age 66. (Delaying the start of benefits for up to four years increases the amount to be received but might, for some, require earlier withdrawals of retirement funds that would be subject to income tax.)

On the minus side, assume that this couple has no other pension plans that will provide retirement income — although many people who entered the workplace 40 years ago have significant defined-benefit pension plans from corporate or government employers. Mr. Luxenberg said there was a one-in-four chance that one member of a couple who had reached 65 would live into his or her 90s. So that person will have to plan for 30 years of income, he said. A rule of thumb, he said, was to draw 4 to 6 percent of retirement assets, adjusted for inflation, each year. For a hypothetical millionaire, that would be $40,000 to $60,000 a year, plus Social Security benefits.

The Times has an article this morning about how $1 million isn’t what it used to be, which, yes, we know! I don’t think we need to be told that having $1 million to retire on isn’t going to allow us to jet set around the world or take trips to space on Richard Branson’s Virgin Galactic spaceship. A financial planner concedes that “folks with $1 million in a well-balanced portfolio can be comfortable,” and that’s all I really want, really, to be comfortable in retirement, and if things go according to plan, I’ll have my million saved (but hopefully more). We can do this, you guys.

I recently procured my first real job (score!), and have come up with a basic budget and blah blah blah. Beyond that though, I do not know what I should be doing to get started at Being A Real Adult Who Makes Good Money Decisions. I have a basic Wells Fargo checking account and a small savings account that was created for me by my parents or something at some point. I also have two credit cards with no rewards to speak of but also no debt. Thats it. That’s what I’m working with.

Should I take the money from my Wells Fargo savings and put it into a high yield savings account like Ally? Should I cancel my credit cards and get a new one with better rewards? Should I start an IRA, or do something else that sounds overwhelmingly confusing? Where should I put the money that I manage to save from my paycheck each month (hopefully about $300-400)? Also, I suppose it should be mentioned that in my particular case, my employer has a retirement option and will start matching (5% I think) after a year. Any advice would be a godsend. I just want to make sure that I make the best choices possible for my future! — S.C.

I’m always really glad when I hear someone who is coming out of college and getting their first job say they want to make the best choices for their future. I mean, you’re not getting grades anymore, but: A+ work! A thing that happens when people get their first jobs sometimes is that they’re suddenly earning income, and that income immediately goes to buying “things”. We all want things, of course, but it’s just so much more important to get a grip on your money before you start spending it. 

Starting out with no debt will give you a great head start. Keep it that way. The first two things you should be doing is paying off your debt, and starting an emergency fund, which it sounds like you’re doing with your Wells Fargo savings account. Set a savings goal of $1,000 at first, and then once you hit that number, just keep saving to have a nice amount of cash to fall back on in case you ever lose your job, or experience any other kind of emergency. Don’t worry about the rules of thumb you hear about from financial advisors saying you need 3 months, or 6 months, or a year’s worth of savings to get you through hard times. That’s just a broad way of saying you need to have an emergency plan set in place. Everyone has a unique set of circumstances. If you have parents or siblings or really close friends who would let you crash with them during a long period of unemployment, that’s a significant amount of living expenses you won’t have to worry about paying while you’re looking for a way to earn money, and that’s really great. So: Have an emergency fund, but have an emergency plan too.

Once you have a plan in place, you can now figure out ways to make your money work for you. I just looked up the interest rate for Wells Fargo and it’s just terrible: 0.01 percent. Yes! Move that money to a higher yield savings account like Ally or ING Direct.

Don’t get too caught up on getting rewards credit cards. Although there are people out there who really know how to make them work for them (and you might be one of them!), it’s really easy to rack up a ton of debt on credit cards, so I only use them rarely. And remember that your credit score will get slightly affected if you cancel your cards, so if you’re doing that to get rewards cards, keep the one you’ve had the longest because it’s the one showing the longest period of time that you’ve been able to make regular payments and be a responsible adult, and that’s a great thing to be able to show to creditors if you’re going to be doing things like renting an apartment, buying a car or a home one day. I was one of six people who put in an application to rent my current apartment, and I’m sure my high credit score was one of the reasons my landlord chose me as the tenant he wanted to have.

Lastly, get started in your company’s retirement plan. You don’t have to contribute too much until your company starts matching your contributions, but it’s important to simply get started. Remember that the money you put into a 401(k) is tax deferred, so even if you don’t get a match this year, you’ll still benefit next year when you’re filing your taxes. And, yes, open an IRA—a Roth IRA if your income allows you to do that because you want to start making compound interest work some magic for you. It’s really easy to do, I promise. You can start one with one of the big three: Vanguard, Fidelity, and T. Rowe Price (I chose Vanguard). Call the one that sounds the best to you, and tell them you want to start a Roth IRA. They will take care of the rest for you and make the process as painless as possible. You are giving them your money to safeguard, so they are willing to do whatever it takes to make this as stress-free as possible. Welcome to adulthood.

Photo: Chris Breikss/Flickr

I am officially done with grad school, and in the fall will begin life as an assistant professor in a large(ish) city in the southwest. My new goal is to buy a house, and I would like to know how I should start going about saving to do this? Salary range for new professors is $50-70k, mine is in the middle. Here are some obstacles I’m facing:

• I will have to start paying back student loans.  
• My awesome car which has lasted me through undergrad and grad school will surely die soon and I will probably have to buy another one. 
• I will have to start paying for my health insurance (right?)
• I should start putting money away for retirement (right?)
• I would like to have a healthy savings account balance.

Thanks!!

P.S. Will I have to get a roommate? I really cannot handle roommates.
P.P.S. Since I’ll be teaching at a state school, will I get to benefit from the 10 year student loan forgiveness thing for working in the public sector?

Why, hello there, professor! First off, congratulations on not living in New York. Your $60,000 salary is going to do much more for you in the southwest. That’s not to say you couldn’t make things work here. My first job in New York paid about $30,000, and I made it work. Yes, I had roommates, but I still was able to make a small dent in my student loans, put some money into savings, and send my folks a little bit of money. I am telling you this because I want you to know that you are going to be okay. You have been dealt a good hand, and not everyone is fortunate to be able to say that. But let’s talk about the thing I think you should address first: your car. 

You need a car to get to work, to get home, to get from here to wherever there may be, and this is more important now than a dream house, or savings right now (the point of having a savings account is so that you can do things like replace your car).

You can drive your car until it dies, and then you could probably get maybe $200 to have someone haul it away for you so they can sell it for parts or fix it up and resell it to someone else. You can trade in your car, but dealers can be fickle depending on what kind of car you have, or what day of the month it is, or what they already have sitting idle in their lot. You can also donate your car and get a deduction on your taxes, which actually might save you the most money. There is also Craigslist and Ebay—someone may want your car, and may offer you a reasonable amount of cash for it.

Smart money people will generally recommend that when you replace your car, you go for a good used model, rather than buying new. They will tell you not to buy a new car because cars are depreciating assets, meaning they lose value once you start driving it. But we live in a time when most Americans can’t afford to run out to buy new cars, so used cars are in demand. And where there is demand, there are price hikes. So you actually might find that some new cars are cheaper than used cars. I’d recommend using Edmunds to compare the costs of new vs. used cars in the model you want to buy. But just because you might get a good deal on a new car doesn’t mean you should buy a new car. You know what your budget is, and if you can spend less than what you intended, that’s really great.

As for your health insurance, I’m surprised the state college you’ll be working for isn’t giving you health benefits. If that’s the case, they must have a plan that they offer to campus employees with reasonable rates. You need health insurance, so this is what you should take care of next. I have had friends who, like a lot of people out there, went without health insurance because of the costs, and then they got hit by cabs while riding their bikes, or discovered lumps where there shouldn’t be lumps, and—you want to make sure you’re covered in some way.

You can save for retirement while dreaming about your new home. If the college is offering a 401(k) plan with a match, you obviously want to contribute to that plan because of the free money. But the thing you should do is start contributing to a Roth IRA, because your salary qualifies you to do that. The great thing about a Roth IRA is that after it’s been open for five years, you’re allowed to withdraw up to $10,000 without a penalty—including any interest the account has earned—to buy your first home. That is a really great thing! Do this while socking a little bit of money away into an emergency fund, and you’re going above and beyond what most of us are doing to make ourselves financially secure.

As for your student loans, I’m pretty sure your employment at a state school qualifies you for the Public Service Loan Forgiveness Program, which will forgive your Federal Direct Loans after you’ve made 120 payments on those loans. The information for that is here, and the application you should fill out is here. Remember that you’re allowed to write off up to $2,500 in qualified student loan interest during tax time, so focus on paying the minimum until these federal loans are forgiven.

I’m going to leave it up to you to figure out the roommate situation. Obviously, living with a roommate will allow you to save a lot more than if you were to rent out a place on your own. My parents lived in a guest room in my uncle’s house for a few years before cramming the kids into a one-bedroom apartment for a few more years so that they could scrape together the money to move us into a nice house when I was eight. That was the decision they chose to make to achieve their American dream of owning a house. We all choose our own routes. It might be worth it to you to spend the bit of extra money for the luxury of living by yourself. That is the decision I’m making now. I loved my roommates when I had them, but I love them even more now that I don’t have to live with them.

Photo: Flickr/flossyflotsam

A reader asks:

I have a somewhat specific and possibly stupid question: I found your posts on 401(k)s and IRAs really helpful, and while you gave great advice about traditional IRA vs. Roth, I’m not sure how to choose between 401(k) and Roth IRA? My company matches up to three percent in my 401(k), so hell yeah free money, that’s what I’m currently enrolled in, but should I roll it over into a Roth IRA? You gave pretty compelling evidence in your IRA post about how Roths are superior to pre-tax IRAs, but what about the whole matching issue?

We don’t have a formal advice column yet, but we’re more than happy to take your questions. I’m not a “financial advisor” so I’m not going to tell you how to invest your money, that said, this question is an easy one!

This is a thing that I have done, and what most smart money people recommend: If you are lucky enough to work at a company that provides a 401(k) plan and a company match, contribute just enough money to get the full match, because yes, free money! Once you get that done, open a Roth IRA and contribute the maximum for the year, which is $5,000 if you’re younger than 50. And then if you’re this amazing person who still has more money to put away for retirement, go back to contributing to your 401(k) until you max that out. Most young people won’t get to this last part where you max out the 401(k) because the max is $17,000, and most people aren’t saving $17,000 a year. If you are, whoa, you’re amazing and will be a very rich old, and all the other olds will be jealous of you.

We’re not here to just to answer these “traditional” questions about money (but we will if that’s what you want!). Want advice on what to do when your friend owes you money, but you don’t know how to bring it up because you feel awkward about it? Or what to do when the guy or girl you’re dating practically lives at your place but isn’t paying rent? We love those questions. Send us an email!

Photo Credit: Flickr/Solo with others

Why you need to know this: Compound interest on your investments will make you totally rich.

Ugh, I know. Just reading the words “compound interest” makes me want to close this tab too, but do yourself a favor and learn about this now, because compound interest is the reason why I started saving for retirement when I was 25, instead of putting it off until I have a mid-life crisis at 35 and realize I need to start saving money or else I’ll have to work for the rest of my life (you don’t want that). It’s the reason why I’m on my way to having a million dollars saved by the time I’m 65 years old.

“But, retirement is so far away!” you argue to yourself. “And I really want to use this money I saved to take a trip to China this summer to, like, really understand how all the gadgets I own are manufactured.”

Yeah, that’s really conscientious of you, but no. You really need to start saving now, because if you do, you’ll be able to retire at a normal age and do all the traveling you want while flying first class on all the best hovercrafts (this is what I’m guessing the world will look like in the year 2045 and I am a retired person). The earlier you start putting money into a retirement account, the more interest you’ll accumulate over time. This is called compound interest, or earning interest on top of the interest you earned in previous years.

Let’s say you’re 25 years old, and you put away $300 a month into an individual retirement account (IRA), and your account earns you an average of 8 percent each year. If you did this regularly for the next 40 years, you would have contributed a total of $144,000 in your account, but would have a little over $1 million saved by the time you were 65. Congratulations, you’re a millionaire! 

Here’s what I just said in chart form, because we all love charts:

But if you waited until you were 35 to start putting $300 a month into a retirement account, you would have about $440,000 saved by the time you were ready to retire at 65. Waiting 10 years to start saving would cost you $567,000. Math! This is why saving as early as you can is so critical.

Even if you were to put a one-time deposit of $5,000 into a retirement account at 25, forget about it, and never deposit another dime, you’d still end up with about $109,000 when you retired at 65. Seriously, you guys, this is the magic of compound interest.

So for the sake your 65-year-old self, start saving. Do it. It doesn’t even have to be a lot. I wasn’t earning very much when I was 25 and first started putting money into a retirement account, but the point is that I was making myself get into the habit of saving regularly. I started with $100 a month, and now I’m socking away $400 a month. I’ll be seeing you on the hovercraft. Join me in first class, won’t you?