Global Advice Center

The Top 5 Retirement Investing Tips for Young People

Posted on May 2, 2010 04:41:45 PM

If you’re like most young Americans, saving up for retirement probably isn’t your first priority right now. You may have thought about it, and you may have even signed up to put 10% of your salary into a 401(k)–good for you, if so. But did you know that 10% probably isn’t going to be enough? Or that each dollar you contribute today will have a much larger effect than each dollar you contribute in 15 years? Read on and let’s get started with the Top 5 Retirement Investing Tips for Young People.

1) Get Started Early. Albert Einstein once said, “The most powerful force in the universe is compound interest.” Your primary advantage right now is your age: Because you’re so young, you have decades of productive time ahead of you to build wealth and create a nice nest egg for retirement, and let compound interest go to work for you to grow your money automatically.

2) Make a Solid Game Plan. How would you like to spend your retirement? A common assumption is that people should plan to retire on 75% of their pre-retirement annual salary, but if you’re like most Americans you already have some big retirement wishes you’d like to see come to fruition. How expensive are they?

You may be better off planning to spend 110% of your pre-retirement annual salary once you take the leap; that way you won’t have to sit at home eating ramen noodles and Spam from the can, waiting for your friends to come over and show you their cruise pictures. Remember, once you retire you’ll have a lot more free time–and free time is the fastest way to spend money.

3) Be Diligent. Once you make your game plan, don’t deviate from it in order to make purchases here and there that you “can’t live without.” Consistency is key here. If you keep investing the same percentage of your salary each year, or maybe even increase that amount, you’ll be in a much better position to enjoy your retirement even if the stock market or housing market crashes right as you’re getting ready to retire.

4) Take Full Advantage of Your Company’s 401(k) Match Program. If you’re lucky enough to work for a company that offers a 401(k) match program, take full advantage. This is free money. For example if your company’s program offers a 50% match for up to 6% of your salary, be sure to contribute at least a full 6% of your salary to your 401(k) to get the full benefit of this match. After that, you can fund a Roth IRA or a regular IRA if you prefer (we recommend the Roth option for young professionals).

5) Explore Several Options for Investing. Different types of retirement accounts offer different features and benefits. For example, as mentioned above, if your company offers a 401(k) match program then you have an opportunity for free money by funding your 401(k). 401(k)s are also tax-deferred, meaning the money you put into them is tax-free until you withdraw it. But there are many rules restricting what you can do with your money in a 401(k) and when, and you’ll be subject to penalties if you try to withdraw it too soon or under the wrong circumstances.

Roth IRAs, on the other hand, are tax sheltered as well (in this case you fund it with post-tax earnings but when you withdraw it will be tax-free), and they offer more flexibility in terms of both withdrawals and investing options. But Roth IRAs have a lower limit on annual contributions than 401(k)s do, and your employer won’t offer a matching program for your contributions to an IRA.