Investing can seem daunting in your 20s.
Just as you’re getting your feet wet in the working world,
you may face financial challenges, such as repaying college debts
and covering new living expenses. Plus it can be difficult to
get excited about planning for something, such as retirement,
that seems so remote. But it’s exactly because retirement
is still a long way off that this is an ideal time to start investing
for it.
The benefits of getting an early start on
a long-term investment program are hard to beat. The longer you
have to invest, the longer your investments have to
compound,
or grow. And the younger you are, the more financial risk you
can afford to take and the better chance you have of riding out
any downturns in the market.
There are three opportunities you don’t
want to pass up:
Contributing to
an employer sponsored, tax-deferred retirement
plan, such as a 401(k), 403(b), or 457
Opening an IRA
Setting up an
investment account with a brokerage firm, mutual
fund, or bank
If you
can afford it, you should try to invest up to 10% of
your pretax income every year. If that’s more than
you can spare, you should invest as much as possible
while still covering your bills and keeping your consumer
debt in check. Remember that if you’re putting money
into an employer-sponsored retirement plan where your
contribution is deducted from your salary, you’re
reducing your taxable income, which frees up money to
invest.
Long-term stock returns Over the short term, stocks can
be
volatile
investments, which means that in some years they may lose value. But
over the long term, the picture changes. From 1926 to 2007, inflation
averaged 3% a year. But large-company stocks as a group provided an
annualized return of 10.4%.
