A recent study by the Bookings Institution found that 52 percent of people between the ages of 21 and 36 have their savings invested in cash. By comparison, all other age groups have approximately 23 percent of their savings in cash.
The risk-averse behavior by young adults isn’t entirely surprising given recent financial events. However, it could prove to hinder long-term retirement saving goals if the trend continues.
Here are some tips for young professionals to consider as they begin thinking about retirement planning and investing for their future:
CREATE A PLAN
It doesn’t need to be complicated, but a plan will help give you a starting point and create a baseline for measuring your goals. Consider starting the process with a site like Mint.com to get a view of your complete financial picture. Then, document your goals, time horizon, investment objectives, and most importantly, your action plan. Consult a professional if needed. Many financial planners will work with you on an hourly basis to help with this step of the process.
MAXIMIZE RETIREMENT ACCOUNTS
Retirement accounts provide tax-deferred growth, a powerful feature that will help boost your long-term returns. If your company offers a 401(k) plan, be sure to check on matching benefits. At the very least, contribute enough to receive the full company match; otherwise, you are leaving free money on the table. If you are self-employed or you don’t have a company plan, utilize an IRA to make monthly contributions. Although it would be wise, you don’t have to start with the maximum amount. Begin with a small, monthly contribution and increase as you get more comfortable with the process.
MANAGE COSTS AND TAXES
You can’t control the direction of the stock market, but you can control — to a certain extent — costs and taxes. The less you pay of each means more money in your pocket. Consider using low-cost ETF’s and index funds in your portfolio to help reduce internal investment costs and increase tax efficiency.
TURN OFF THE NEWS
While it is often entertaining, it is typically far from helpful. With retirement 25-plus years away, short-term market predictions shouldn’t influence your long-term investment plan. Do your best to avoid the noise and stay focused on the plan you put in place to help avoid costly money mistakes.
SAVE THAT BONUS
I know, it’s tempting to spend. However, a bonus is a great opportunity to give your retirement account a boost. Consider living off your bonus that month and defer your full monthly paycheck into your 401(k) plan or designated retirement account.
As you think about your financial future, consider that you might spend more than a third of your life in retirement. Investing in cash might provide some relief in the near term but will likely not keep pace with inflation and could hinder your long-term goals.
Retirement Planning Strategies in Plain English
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