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Retirement investing in our 20s

Dear Dr. Don,
My husband and I are looking into investing for retirement. We're fairly young (25) and we don't know where to start. Is a money market good for us? If not, where should we invest? It's strictly for investment; we won't be taking the money out at all. Please help!
Josie Jumpstart

Dear Josie:
As young marrieds, it's great that you're able to find room in your household budget to start investing for retirement. Getting an early start on this financial goal can make it much easier to succeed in reaching the goal of a comfortable retirement.

In general, it's a good idea to match your investments to your planning horizon. In your twenties, with plenty of time until retirement, investing in short-term money market investments is too conservative a strategy.

Your basic choices among financial securities are stocks, bonds and cash (money markets). I just told you that cash isn't the best place for your long-term investments, so that leaves you with stocks and bonds.

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Before we get too deep into investment selection, let's consider the type of account that will hold these investments. Common choices among retirement accounts are 401(k) or 403(b) plans available from your employers, or traditional or Roth IRA accounts. These accounts are tax advantaged, with the first three allowing you to invest pretax dollars. Earnings and contributions aren't taxed until they are distributed from the account.

In a Roth IRA account you contribute after-tax dollars, but the investment earnings are tax free when withdrawn from the account as qualified distributions.

If your employer matches all or part of your contributions to a 401(k) or 403(b) plan, then that's the first place to start investing. The plan sponsor will provide you with information on the investments available and you'll have to choose from those investments.

When you're just starting out investing for retirement, it makes more sense to concentrate your investments in diversified mutual funds than diversifying your investments among concentrated funds. Make sure you understand the annual fees and expenses associated with any investment, including sales loads (commissions) due the financial adviser, if any.

A good first choice for a mutual fund investor is a balanced fund that invests in both stocks and bonds. If you decide against investing in bonds, then a no-load stock index fund that invests in a broad market index like the S&P 500 or the Wilshire 5000 is a good place for your retirement monies.

-- Posted: June 3, 2004

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Getting started investing
Where to begin investing
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