At some point, nearly every worker comes to the realization that they need to pay attention to their future and begin saving and investing. Hopefully this happens in your 20s rather than your 30s or 40s, as time is a key element when it comes to investing for long-term goals like retirement.
As a first step, consider investing in your 401(k) or other employer-sponsored retirement plan. These are generally very easy to enroll in, and many employers match your contribution up to a certain dollar amount. This is free money your employer contributes to your account for participating—don’t give this up! Even if the market is volatile like we’ve seen, you can still benefit from contributing up to your employer’s match.
401(k) plans help participants dollar cost average money into the market. Each pay period, a specified percent of your paycheck is invested. When the market is down, you’re able to get more shares of your investment choices. This can likely set you up for success when the market recovers. Furthermore, 401(k) plans often have a limited amount of choices, so the investment decision isn’t overwhelming.
All 401(k) plans have a default option for investments. One of the most common default options is a target-date fund that corresponds to your potential retirement age. The earliest plan participants can withdraw their money without penalty is 59 ½, so if you’re 28, you’re likely looking at a target-date fund that runs at least through 2055 or 2060. Target-date funds usually have a blend of growth and fixed investments where the asset allocation to fixed investments increases the closer you get to the retirement date.
Target-date funds aren’t bad investments and can be useful for someone who is just beginning to learn about investing; however, we often find them more conservative than some investors need. If you are able to work with a financial adviser, he or she will likely recommend funds that are all stocks, often modeled after a particular index. With a long time horizon, a younger investor can afford to invest their 401(k) aggressively in funds designed for growth.
As you’re starting to build your 401(k), beginning investors should also make sure they have money set aside for emergencies. A typical emergency fund can be between three- and six-months’ worth of expenses. You want to have money available should you lose you job or have an unexpected expense arise. This can save you from having to pull money out of your 401(k), which could incur penalties.
Once the emergency fund is set and 401(k) contributions are on autopilot, we generally recommend diversifying your investments by tax status. A 401(k) is a tax-deferred vehicle, so when you withdraw funds in retirement, you pay ordinary taxes on the distributions. Investors can diversify by tax status by saving to a Roth IRA or Roth 401(k) option with after-tax money. These accounts generally provide tax-free growth of your money.
If you find yourself also saving for a non-retirement goal, like a down payment for a house, you may consider a regular brokerage account where you can invest in a variety of investments, like stocks, mutual funds, and exchange-traded funds. You’ll also have easier access to your money because there are no restrictions on withdrawals. However, we highly recommend prioritizing your retirement savings. Given our modern life span, young investors today can likely expect to live about 30 years in retirement. Taking into account your expenses each year and multiplying that by decades, you’ll start to realize the tremendous savings goal that is retirement.
If you have questions regarding your beginning investment steps, the experts at Henssler Financial will be glad to help: