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Workers who start saving in their 20s and 30s can benefit from the magic of compounding and can see through the ups and downs of a stock market An early start also is a very effective strategy if you're worried about how much you can set aside
YOUNG investors spooked by market volatility are continuing to shun equities. But, is that any reason not to be thinking about saving for a secure retirement at a young age?
Absolutely not. A survey by Reuters of several dozen top retirement experts reinforces the importance of starting early for this simple reason: Time is on your side. Workers in their twenties and thirties have plenty of time to benefit from the magic of compound returns and to allow the market to bounce through its usual ups and downs.
Here are the most important steps young savers can take to build retirement security: Start early, start small: If you read no further in this article, absorb this point: Above all else, get an early start. Nothing will have a greater impact on your success, due to the effects of compound returns over time. This will be true if historical market returns continue — even if you start small and even if there are bumps in the road. "A retirement account contribution of $5,000 today at age 23 will be worth nearly $300,000 when you retire at age 70, assuming a 9 per cent return," notes Bob Morrison, a financial planner in Denver.
An early start also is a very effective strategy if you're worried about how much you can set aside.
Vanguard Investments tested scenarios and investment strategies for investors age 25, 35 and 45, aiming for a retirement age of 65. The investor who starts at age 25 with a moderate investment allocation and contributes 6 per cent of his salary will finish with 34 per cent more in his account than the same investor who starts at 35 -and 64 per cent more than an investor who starts at 45.
Put another way, the 35 year old would need to boost his contribution rate to 9 per cent to achieve the same result as the 25year-old starter who was saving 6 per cent.
Save as much as you can: Starting early may permit a lower rate of saving — but, that doesn't mean you shouldn't put away as much as you can handle comfortably.
Vanguard found that the contribution rate — along with the early start — has a much larger impact on retirement success than market returns.
It's a matter of controlling what you can control. Your timing and investment rate both have a much larger effect over time than what the market does. Higher contribution rates also are useful if you're scared by stock market risk and prefer a less aggressive portfolio.
Vanguard found that a retirement saver starting at 25 saving 9 per cent of salary annually with a moderate allocation finished with 13 per cent more than by contributing 6 per cent in an aggressively-invested account.
Don't cash out: Don't cash out your 401(k) when changing jobs, no matter how small the balance.
This interrupts the flow of compound returns and it's very difficult to make up lost ground over time. Instead, roll over the account to your new employer or a low-cost standalone IRA, or leave it in place if it's a good plan.
Get the match: Make sure to contribute enough to max out any matching contribution from your employer; otherwise you're leaving free money on the table. Research by Aon Hewitt found that 43 per cent of workers in their 20s contribute to 401(k) at rates too low to capture the full match, compared with 29 per cent of all workplace savers.
At a time when we're struggling to get 1 per cent returns on CDs, young people are foregoing a 100 per cent rate of return here. It's a huge mistake.
Monitor fees: The total cost of workplace plans vary widely — anywhere from well below 1 percentage point to a whopping 5 per cent. Over time, fees can take a big bite out of returns. Wherever possible, seek out low-cost index funds within your workplace plan; if no low cost options exist, your plan may offer the option of a 'brokerage window' that allows you to buy and trade whatever stocks, mutual funds or ETFs are offered by your plan's vendor.
Likewise, if your employer's plan offers a target date fund option (TDF), don't assume this is your best option. TDFs can help by allocating your investments in an age-appropriate way, but many carry higher costs.
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