Getting Started - Retirement Planning For Young Adults

For many people fresh out of college, retirement planning is an incredibly boring subject. Who wants to save for something so far in the future, when there are so many things to be purchased now? Unfortunately, this tends to lead to many more years spent in the workforce, or a lower quality of life upon retirement. Indeed, the smart saver begins preparing for retirement before even beginning college!

The key thing to know, which a lot of people (including myself) struggle with, is that it's never too early to get started, as long as you're bringing in some money. Any amount, with enough interest, becomes significant! Of course, don't take that too far - you have be be making enough on the investment to cover any fees! If you can't invest at least $500, it might be more sensible to put the money in a special savings account (or, better, a CD) to grow until you can fund a retirement account.

Almost every employer these days offers a 401(k) plan. Take advantage of it! Even if you earn very little, money adds up a lot over the course of 40 years or so, and you establish the habit of saving. True, you may be making a lot more a few years from now...which means you'll then be able to increase your contributions!

If your employer does not offer a 401(k), you can set up an IRA yourself; in fact, for a young person, a Roth IRA is better than a 401(k)! The reason for this is the difference in how the IRS treats them; contributions to a Roth are made with after-tax dollars and not taxed thereafter, while contributions to a 401(k) are made with pretax dollars and taxed on withdrawal. If you start young, you probably fall into one of the bottom tax brackets, so it makes sense to pay taxes now rather than later.

How should you set up your retirement accounts? Diversity is always a good thing; invest in at least three mutual funds of different types (or that speculate in different areas); then you're more protected than if you were putting all your eggs in one basket. When you have many decades to go before retirement, you can afford to be aggressive, as your portfolio has time to rebound; however, that can be taken to an extreme; don't take being aggressive to mean you should invest in penny stocks and junk bonds. Remember: if your investment loses its entire value, it will never rebound!

The most important thing is to set up your account, set up automatic payments into it, and then leave it alone. Hardly anyone can beat the market, and moving funds around tends to lower your overall returns. The automatic payments are important so that you don't forget to keep investing (or decide that you have more important places to spend the money). Time and a lack of interference on your part will eventually grow the account into something capable of supporting a comfortable retirement.

William Springer frequently blogs about anything that happens to interest him on his blog, What William Said. Usually this tends towards computer stuff (he's currently finishing a PhD in computer science), politics, photography, and board games. He also writes about financial matters for Twenties Retirement, the retirement site for people starting young.