Start saving for retirement as early as possible, even if it's just a small amount each month. Put money into a 401(k) if available, or an IRA. When young you can take on more risk with your investments for potentially higher returns. The power of compound interest means that investing just $200 per month from age 25 could grow to over $525,000 by retirement at age 65 with a 7% average annual return. Maintain a diversified portfolio across different market categories and asset types, keep costs low by investing in index funds, and invest regularly and disciplined over the long term. Rebalance your portfolio periodically to maintain your target asset allocation.
2. Too many young people rarely—if ever—
invest for retirement. Some distant date,
40 or so years in the future, is difficult
for many young people
without investments
to fathom. But
to supplement
retirement income (if any), these future
retirees will have a hard time paying for
life's necessities.
3. Start Early
Start saving as soon as you go to work
by participating in a 401(k) retirement
plan, if it's offered by your employer. If a
401(k) plan is not available, establish an
Individual Retirement Account (IRA) and
earmark a percentage of your
compensation for a monthly contribution
to the account.
4. Early Higher Risk
Allocation
Another reason to start saving early is that the
younger you are, the less likely you are to have
burdensome financial obligations: a spouse,
children and a mortgage, to name a few. Without
these burdens, you can allocate a small portion
of your investment portfolio to higher-risk
investments, which can return higher yields.
5. An Exemplary Egg
Toillustrate the advantageof
investing assoon aspossible,
assumethat you invest$200
every month starting at age
25. If you earn a7%annual
return on that money, when
you're 65,your retirement
nesteggwillbe
approximately $525,000.
6. Diversify
The idea is to select stocks across a broad
spectrum of market categories. This is
best achieved through an index fund. Aim
to invest in conservative stocks with
regular dividends, stocks with long-term
growth potential, and a small percentage
of stocks with better returns or higher
risk potential.
7. Keep Costs to a
Minimum
Invest with a discount brokerage firm. Another
reason to consider index funds when beginning
to invest is that they have low fees. Because
you'll be investing for the long term, don't buy
and sell regularly in response to market ups and
downs. This saves you commission expenses
and management fees and may prevent cash
losses when the price of your stock declines.
8. Discipline and
Regular Investing
Make sure that you
your investments
put money into
on a regular,
disciplined basis. This may not be
possible if you lose your job, but once
you find new employment, continue to
put money into your portfolio.
9. Asset Allocation
and Re-Balancing
Assign a certain percentage of
your portfolio to growth stocks,
dividend-paying stocks, index
funds, and stocks with higher risk
but better returns.
10. The Bottom Line
Disciplined, regular, diversified
investments in a tax-deferred 401(k),
IRA or a potentially tax-free Roth IRA,
and smart portfolio management can
build a significant nest egg for
retirement. A portfolio with tax liability,
dividends, and the sale of profitable
stock can provide cash to supplement
employment or business income.