Jan 12 Young investors spooked by market
volatility are continuing to shun equities (see). But is that any reason not to
be thinking about saving for a secure retirement at a young
Absolutely not. A survey by Reuters of several dozen top
retirement experts reinforces the importance of starting early
for this simple reason: Time is on your side. Workers in their
twenties and thirties have plenty of time to benefit from the
magic of compound returns and to allow the market to bounce
through its usual ups and downs.
Here are the six most important steps young savers can take
to build retirement security:
1: START EARLY, START SMALL
If you read no further in this article, absorb this point:
Above all else, get an early start. Nothing will have a greater
impact on your success, due to the effects of compound returns
over time. This will be true if historical market returns
continue - even if you start small and even if there are bumps
in the road. "A retirement account contribution of $5,000 today
at age 23 will be worth nearly $300,000 when you retire at age
70, assuming a 9 percent return," notes Bob Morrison, a
financial planner in Denver.
The early start also is a very effective strategy if you're
worried about how much you can set aside.
Vanguard Investments tested scenarios and investment
strategies for investors age 25, 35 and 45, aiming for a
retirement age of 65. The investor who starts at age 25 with a
moderate investment allocation and contributes 6 percent of
salary will finish with 34 percent more in her account than the
same investor who starts at 35 - and 64 percent more than an
investor who starts at 45.
Put another way, the 35-year-old would need to boost her
contribution rate to 9 percent to achieve the same result as
the 25-year-old starter who was saving 6 percent.
2: SAVE AS MUCH AS YOU CAN
Starting early may permit a lower rate of saving - but that
doesn't mean you shouldn't sock away as much as you can handle
comfortably. Vanguard found that the contribution rate - along
with the early start - has a much larger impact on retirement
success than market returns.
"It's a matter of controlling what you can control," says
Maria Bruno, a senior investment analyst at Vanguard. "Your
timing and investment rate both have a much larger effect over
time than what the market does."
Higher contribution rates also are useful if you're scared
by stock market risk and prefer a less aggressive portfolio.
Vanguard found that a retirement saver starting at 25 saving 9
percent of salary annually with a moderate allocation finished
with 13 percent more than by contributing 6 percent in an
3:DON'T CASH OUT
Don't cash out your 401(k) when changing jobs, no matter
how small the balance. This interrupts the flow of compound
returns and it's very difficult to make up lost ground over
time. Instead, roll over the account to your new employer or a
low-cost stand-alone IRA, or leave it in place if it's a good
4:GET THE MATCH
Make sure to contribute enough to max out any matching
contribution from your employer; otherwise you're leaving free
money on the table. Research by Aon Hewitt found that 43
percent of workers in their 20s contribute to 401(k)s at rates
too low to capture the full match, compared with 29 percent of
all workplace savers.
"At a time when we're struggling to get 1 percent returns
on CDs, young people are foregoing a 100 percent rate of return
here," Morrison says. It's a huge mistake."
The total cost of workplace plans vary widely - anywhere
from well below 1 percentage point to a whopping 5 percent.
Over time, fees can take a big bite out of returns. Wherever
possible, seek out low-cost index funds within your workplace
plan; if no low-cost options exist, your plan may offer the
option of a "brokerage window" that allows you to buy and trade
whatever stocks, mutual funds or ETFs are offered by your
Likewise, if your employer's plan offers a target date fund
option (TDF), don't assume this is your best option. TDFs can
help by allocating your investments in an age-appropriate way,
but many carry higher costs.
6: USE A ROTH
Your workplace plan may not offer a Roth option, so
consider contributing to a stand-alone Roth IRA with funds over
and above your employer match. You an contribute up to $5,000
annually, no matter what you're doing in your workplace plan so
long as your income is below $110,00 (single) or $173,000
(married). "Roth contributions grow tax free forever, which is
a great thing for young people," says Kathleen Campbell, a
planner in Ft. Myers, Florida.
Mary Brooks, a planner in Colorado Springs, Colorado,
suggests shoveling annual raises into your retirement account -
but I especially liked her caveat: "Of course, the very first
extra money received should be used for an immediate pleasure -
dinner out, or a treat at a coffee shop. It's as important to
reward yourself in a tangible way as it is to implement the
The author is a Reuters columnist. The opinions expressed
are his own.