When you are young, it can be incredibly tempting to put off saving for retirement. Retirement seems like this distant, irrelevant dream that couldn’t be less relevant to the needs of the present. Yet, saving early and often is one of the biggest keys to success and a happy retirement. If you want to enjoy your retirement years in peace without worrying about how you are going to provide for life’s basic needs, then the time to start saving for retirement is now.
Here are several tips that can help get you pointed in the right direction and on your way to building a strong retirement portfolio.
1. Don’t Be Intimidated by the Stock Market
Countless young investors use the excuse that they are just too intimidated by the complexities of the stock market to feel confident investing. You shouldn’t let this stop you. In this age of easy access to information, comprehensive investing information for beginners is just a tap away on your smartphone.
If you would like to invest for yourself, there are also many target-date retirement mutual funds and ETFs (Exchange Traded Funds) that sell shares of pre-diversified funds (large portfolios of stocks or bonds, typically) you can buy into easily with very little money. Some of these funds can started with as little as $100, with future investments of even smaller amounts. Again, there are easy smartphone apps that can help with this as well.
2. Get Started Right Away
Time is of the essence when it comes to investing for your retirement. This is largely due to the magic of compounding interest. Money invested today and given many years to grow will increase to many times its current value if allowed to grow over time. The later you invest, the more growth you miss out on.
3. Make the Most of a Tax-Advantaged Retirement Account
If your employer offers a 401(k) plan, take advantage of it by making regular contributions, ideally with a part of each paycheck. Many employers will even offer to match your contributions with their own up to a certain amount. For example, some employers will match 50 percent of every dollar contributed up to $5,000 per year, every year. These contribution matches are essentially free money. In this example, your employer would deposit $2,500 for free if you just deposited $5,000 to your 401(k).
If your employer does not provide a 401(k) plan, you can set up an IRA (Individual Retirement Account) for yourself instead. There are two types of IRAs, the Roth and the Traditional. The Roth IRA allows you to make contributions to your retirement account after taxes, and not have to pay taxes on the money you withdraw after you retire. The Traditional IRA works the opposite way, allowing you to make pre-tax contributions (the contributions are tax deductible each year), but then you have to pay regular income taxes on the withdrawals after you retire. Which one you choose will depend on your tax bracket and whether you’d rather be taxed in the tax bracket you are in now, or the one you’ll be in after you retire.
4. Take Higher Risks Early on, and Lower Risks Later
If you get started early with investing for retirement, you can usually afford to take more risk in terms of the types of investments you choose. Many young investors will use a portion of their portfolios to invest in aggressive growth stocks that yield high returns with higher risks. As you get older, you may want to phase out the higher risk investments in favor of progressively lower risk investments. A middle-aged person might invest in some conservative growth stocks or value stocks, and a senior might only invest in bonds. At each stage of life, your portfolio will likely include a mix of different risk profiles, in varying allotments, according to your comfort level.
5. Diversify Your Portfolio to Help with Market Fluctuations
The markets are always changing, and you will not have a way of precisely predicting what they will do. Even individual companies can be quite unpredictable. It is important to diversify your portfolio to avoid experiencing a loss when one industry or type of investment takes an unexpected turn.
The easiest way for most young investors to diversify properly is to simply use an index fund. Many index funds are available, tracking various metrics and sectors. Try to invest in a mix of stocks with long-term growth potential, conservative stocks that issue regular dividends, and stocks with high returns but more risk.
If you have a larger account and a lot of knowledge and understanding of the stock market, try to keep any individual stock holding to 4 percent or less of your portfolio value so that major downswings in an individual stock won’t upset your whole portfolio.
6. Watch Out for Fees and Keep Costs Low
For most young investors, it is best to invest with an online discount brokerage. These websites typically have much lower fees than full-service brokerages do. Try to select a brokerage that charges very low fees, because trading fees can eat up a significant percentage of your profits if you are not careful.
Once your account is set up, avoid buying and selling frequently. Instead, try to buy and hold investments for as long as possible to minimize excessive trading activity and fees. As a rule of thumb, index funds will allow you to maintain a diverse portfolio with radically lower trading fees than you would have incurred had you invested manually in a wide variety of individual stocks.
Hopefully these tips prove helpful to you as you invest for your retirement. If you’ve already begun saving and investing for your retirement as a young person, you are well on your way to a healthy financial future, and well ahead of many of your peers. Congratulations! If you have any other tips you’ve discovered, feel free to share them with fellow investors in the comments below.