(Reuters) - Young investors spooked by market volatility are continuing to shun equities (see link.reuters.com/puj95s). But is that any reason not to be thinking about saving for a secure retirement at a young age?
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:
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.
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 aggressively-invested account.
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 plan.
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 plan’s vendor.
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.
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 retirement plan.”
The author is a Reuters columnist. The opinions expressed are his own.
Editing by Linda Stern and Beth Pinsker Gladstone