1 Reason Young Investors Deserve a High-Five

Our 401(k) balances reached record highs last year. By admirably doing their part, young people helped make this happen. In fact, a recent study finds that young people are not only saving more money for retirement than the average worker, but they're also doing so in a way that all investors should mirror.

Study findings
According to Fidelity, 37% of employer-sponsored retirement plans offer a Roth savings option, up from 12% just five years ago. And the study finds that younger investors make use of the Roth 401(k) option the most. In fact, 10% of 401(k) participants in their 20s contribute to the Roth 401(k) option, versus just 6% of all participants. And employees who contribute to the Roth option also accomplish a higher savings rate, deferring an average of 11% of their salaries, versus the average rate that's closer to half that percentage.

Better yet, young investors are employing some savvy retirement savings tactics. Nearly six out of 10 of these young Roth participants use a tax diversification strategy. Tax diversification refers to investing in accounts with differing tax treatments. Investors achieve this by saving a portion of their contributions in the post-tax Roth 401(k) in addition to setting money aside in the pre-tax 401(k) savings option. That way, investors will have flexibility in retirement and can be well equipped to counter the ever-changing tax environment.

No Roth 401(k)? No worries.
Because of the huge likelihood that taxes will be higher when they reach retirement and their long investment time horizon, young investors are beatifically positioned to benefit from the Roth. But if your employer doesn't offer the Roth 401(k) option, you can still save money tax-free by opening a Roth IRA. As long as you qualify, you can contribute thousands of dollars annually. Also, in a Roth IRA, your investment options aren't limited to what your employer deems best. You can invest in whatever stocks, exchange-traded funds, and mutual funds you like.

Because young people have decades to save (tax-free, no less) for retirement, you should invest the majority of your contributions in growth investments. These investments come with a higher level of risk but also boast greater return potential. For example, iShares Russell 2000 ETF (NYSEMKT: IWM  ) opens up the exciting world of small-cap stocks, which over time have yielded higher returns than any other asset class. Meanwhile, Vanguard Emerging Markets ETF (NYSEMKT: VWO  ) gives you incredible exposure to the high-growth economies of developing market nations like China, India, and Brazil.

If stocks are more your thing, keep in mind that the best companies boast well-known products and lots of potential for growth. For example, Chipotle's (NYSE: CMG  ) well-liked and tasty products feed tons of burrito-craving people every day. But when it comes to the company's international growth prospects, Chipotle has hardly fired up the burners. The company boasts roughly 1,410 locations, but only about a dozen of them are located outside the United States.  

Meanwhile, Coca-Cola (NYSE: KO  ) formulates our favorite sodas. But Coke is expanding its portfolio of noncarbonated beverages, which consumers are increasingly reaching for over traditional colas.  During the past several years, Coke has exemplified this commitment by acquiring growing brands such as Honest Tea, Odwalla juice, and, more recently, Innocent smoothies and Zico coconut water. 

Apple's (NASDAQ: AAPL  ) wildly popular iDevices have been flying off store shelves for years now. And even though the company is facing fiercer competition, it still boasts very impressive sales growth figures and enticing international growth prospects. I think Apple's recent stock-price pullback presents an amazing opportunity to buy the stock now that it's trading at a 52-week low.

Foolish bottom line
Forming good habits of saving money is so important, especially when you're young and have time on your side. Surprisingly, these habits are actually more important than the amount of money you save. By diligently socking away just a small portion of your paycheck into your 401(k) or a Roth IRA, over time you'll be astonished by how much the money has grown. Keep up the good work, young investors. You're off to a fantastic start.

Apple is at the center of technology's largest revolution ever, and longtime shareholders have been handsomely rewarded, with more than 1,000% gains. However, there is a debate raging as to whether Apple remains a buy. The Motley Fool's senior technology analyst and managing bureau chief, Eric Bleeker, is prepared to fill you in on both reasons to buy and reasons to sell Apple, and what opportunities are left for the company (and your portfolio) going forward. To get instant access to his latest thinking on Apple, simply click here now.


Read/Post Comments (5) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 05, 2013, at 10:59 PM, jamiemcd wrote:

    I was really excited about the Roth 401(k) option, but after reading another article I decided a traditional 401(k) was a bit better for me. Why? Because I made around $100,000 and the $17,000 that would go into a Roth would be taxed at my highest rate. Whereas if I put it into a traditional, it would reduce my income down to a level where I wasn't paying anything at the higher rate (though I still paid at the lower rate). This is the link that changed my mind: http://thefinancebuff.com/case-against-roth-401k.html

  • Report this Comment On March 05, 2013, at 11:00 PM, jamiemcd wrote:

    I should add that I still max out my traditional 401(k) each year AND put $5,000 into a Roth IRA. I just don't use my Roth 401(k) option.

  • Report this Comment On March 06, 2013, at 11:16 AM, seghetti wrote:

    jamiemcd--Everyone's situation is different. Congrats on your savings accomplishments. Keep it up and Fool on!

  • Report this Comment On March 06, 2013, at 11:23 AM, TMFBlacknGold wrote:

    +1 for using the word "beatifically"

    Fool on!

  • Report this Comment On March 06, 2013, at 1:16 PM, CathyYu wrote:

    http://blog.sprinklebit.com/infographic-are-young-investors-...

    I totally agree! Young investors are an up and coming trend. Take a look at this article I found, it totally highlights the pitfalls they will often fall into, and how to avoid them.

    Love that!

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