Recs

11

Retirement Planning for Twentysomethings

As a young adult who is at least 40 years away from retiring, what should I be thinking about retirement? I'm 26, I have a good job, and I contribute enough to my 403(b) to collect the whole match. I don't have tons of credit card debt but I do have a car loan and student loans. How should I balance paying off debt with saving for retirement? I haven't maxed out my contributions to my plan at work and I probably can't afford to right now, but I have extra money I could be saving. Should I care about IRAs?
--S., Boston

First of all, S. deserves tons of credit for getting started early. If you're under 30, you'd do well to follow that example. I used to work for a retirement plan provider and I've seen the trends: The number of people under 30 who are contributing to a 401(k) or 403(b) at all is very low -- way too low. And that's a shame, because the dollars you put away for retirement now are the most valuable dollars you'll ever save.

Consider: Every $1,000 you invest now at a 10% rate of return (a reasonable expectation for long-term stock market gains) will be worth just over $45,000 in 40 years. If you're a good stock picker (or find good mutual funds) and can average a 15% annual return, that $1,000 will be worth almost $268,000 in 40 years. (This, by the way, is why we Fools harp so much on the benefits of outperforming the market, and on seemingly small differences in investment performance over time. $45,000 is great, but $268,000 is really great.)

On the other hand, if you, like many of your peers, decided to wait another 20 years before you started saving for retirement, each $1,000 you invested would be worth just a bit over $6,700 20 years later. Big, big difference. So by starting early, you give yourself a huge advantage in the quest for a comfortable retirement.

Contributing enough to collect your employer's match (what we Fools call "free money") is another huge win. Hopefully, you can put that money into the stock market via the best investment choices available in your plan, while keeping an eye on how those choices are performing over time. At your age, you probably don't want to keep a significant portion of your portfolio in fixed-income investments unless your risk tolerance is really low.

Debt vs. investments
It's good to want to increase your rate of savings, but I'm kind of obliged to say that if you have any credit card debt at all, you should get rid of that before doing anything else -- and make sure your monthly cash flow is sufficient to avoid accumulating any new ongoing charges. Those with significant credit card debt -- more than they can easily pay off in a few months -- should run (don't walk) to the Fool's Get Out Of Debt Seminar before they do anything else. And if you have lower-interest debt like student loans or a car loan... Well, some would tell you to pay them off early if you can, but I would just continue to make regular payments and choose to get that "extra" money invested instead.

To IRA or not to IRA
IRAs come in several flavors, but the two biggies are "traditional" and Roth. (Learn about the difference here.) Someone in their 20s should care about IRAs if:

•  They're contributing enough to your workplace plan to collect the full amount of your employer's match;

•  They are able to contribute more; and

•  They want the broadest possible range of investment choices.

Additionally, a Roth IRA can give you:

•  An emergency fund, thanks to rules that allow you to withdraw your contributions (though not your investment gains) at any time without penalty;

but

•  You'll lose the ability to deduct your contribution for tax purposes.

For most Fools, investing that extra money in an IRA offers a clear advantage. After all, would you rather choose your investments from a menu of 20 mutual funds or have the freedom to pick great stocks like Vail Resorts (NYSE: MTN  ) , Sony (NYSE: SNE  ) , or DreamWorks Animation (NYSE: DWA  ) all on your own?

Thanks for writing, S., and best of luck!

P.S.: If you'd like more help coming up with a plan for retirement investing, consider trying out the Fool's Rule Your Retirement newsletter. It will tell you everything you need to know to set up a simple but effective strategy for your retirement investments -- and you can take a look absolutely free for 30 days.

Fool contributor John Rosevear wishes that he had saved more when he was in his 20s -- and that he had put a little less of it into technology stocks in the late 1990s. Vail Resorts is a Hidden Gems recommendation. DreamWorks is a Stock Advisor recommendation. The Motley Fool's disclosure policy never suffers from extraordinary delusions and wouldn't dream of getting caught up in the madness of crowds.


Read/Post Comments (0) | Recommend This Article (11)

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.

Be the first one to comment on this article.

DocumentId: 530338, ~/Articles/ArticleHandler.aspx, 7/23/2014 7:22:34 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

John Rosevear
TMFMarlowe

John Rosevear is the senior auto specialist for Fool.com. John has been writing for the Fool since 2007. A lifelong car nerd, his current daily driver is a Cadillac CTS-V.

Today's Market

updated 10 hours ago Sponsored by:
DOW 17,113.54 61.81 0.36%
S&P 500 1,983.53 9.90 0.50%
NASD 4,456.02 31.31 0.71%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

7/22/2014 3:59 PM
DWA $22.36 Down -0.04 -0.18%
DreamWorks Animati… CAPS Rating: ****
MTN $78.50 Up +0.92 +1.19%
Vail Resorts CAPS Rating: **
SNE $16.69 Down -0.02 -0.12%
Sony Corp (ADR) CAPS Rating: **

Advertisement