Mutual Funts
Join now to read essay Mutual Funts
Retirement Planning for 20-Somethings:
[email protected]
Dont Fall Into the Playing It Safe Trap
By JEFF D. OPDYKE
November 15, 2006; Page D1
If youre in your 20s, you could be missing out on what may be your best chance to kick-start your nest egg.
With so many 20-somethings burdened by college debt, buying houses, starting families and generous spending habits, its something of a marvel that they are contributing to their 401(k) accounts at all — but, by and large, they are.
The problem is, many of them dont put much thought into where theyre investing their money. Youre not going to build much of a nest egg with your money stuffed into low-yielding bond and money-market mutual funds, which is where too much of it sits.
A recent Fidelity Investments study of nine million 401(k) participants found that 16% of workers in their 20s have no money in stocks. Separately, many have all of their money in just one investment, and of those nearly 40% have all their assets in conservative investments, such as “stable-value” funds, which are little more than glorified money-market funds, or fixed-income funds.
401(K) BASICS
• Max out: Contribute enough to capture your employers maximum matching contribution.
• Allocate: People in their 20s should generally have at least 70% of their account in stocks. You have a long time to save; dont fret about market volatility.
• Dont default: Avoid your plans default option if its a money-market or stable-value fund. The low returns wont serve you well over time.
The youngest generation of workers has the most to gain and the most to lose when it comes to retirement savings. They have the longest period of time to benefit from compounded returns. Yet theyre also the group most likely to suffer if Social Security is ever scaled back. And the chances of living off of a meaningful corporate pension 40 years from now are dim, to say the least.
Thats why its urgent to take control of your 401(k) account and allocate your money to engineer the kinds of returns youre going to need to fund your retirement.
One easy way to build a properly diversified portfolio: Invest in a target, or life-cycle, fund. Four out of five 401(k) plans now offer these one-stop-shopping options. All you do is pick a date in the future, near to when youre likely to retire — say, 2050 for a current 25-year-old — and have your 401(k) contributions flow into the fund built for that time period.
Because these funds are dynamic, changing their asset composition as you age, you wont have to make any other asset-allocation decisions. They invest aggressively in stocks in the early years when youre young and can accept the risk of volatile stock prices, then grow increasingly conservative, moving into bonds and cash as the decades pass and your retirement age approaches.
For instance, Vanguards Target Retirement 2050 Fund is invested nearly 90% in stocks — and its Retirement 2005 Fund, for workers retiring before 2008, is less than 50% stocks.
If your 401(k) doesnt offer a targeted fund, or if you just want to do the work yourself, allocating money isnt quantum physics.
One common industry benchmark is to subtract your age from 100, with that amount going into stocks. Its simplistic, but it gets you closer to where you need to be. So, for instance, if youre 25, youd want about 75% of your 401(k) contributions going into stock funds.
Risk tolerance will play a role, “but dont be too focused on it,” says Fidelity Senior Vice President Jamie Cornell. Remember: Over long stretches, the stock market rises despite short-term periods of upheaval. And since you wont touch your 401(k) money for 50 or even 60 years, you can tolerate the inevitable volatility. You might lower your stock exposure to, say, 70% if youre conservative, or raise to 90% or more if the volatility wont faze you.
Most companies providing 401(k) plans offer free online planning advice to help clients with asset allocation. T. Rowe Price clients, for instance, can access Morningstar Retirement Manager, which allocates assets based on the funds within a particular plan.
Principal Financial Group offers its 2.4 million 401(k) plan participants a nine-question online quiz that ultimately leads