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Retirement savings in your 20s

Dear Dr. Don,
I just turned 26 years old, and I'm concerned about my retirement savings plan ... because I don't have one. About two years ago, I worked at a job that had a 401(k). I've since moved and redeemed my 401(k). Since my move, I have been at a job that does not offer a retirement account. I have no IRA or retirement savings. I do, however, have a savings account, but I know I need to get a retirement account started, but I don't know how.

Where do I go to start an IRA? How do I know where the best IRA account is? I have no idea how to go about this. All I know is that I should start one! Thank you.
-- Alisa Accumulate

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Dear Alisa,
It's hard to make retirement savings a priority in your 20s. There's a lot of pent up demand for cars, homes, furniture, etc., that makes saving for something that will happen 40 years from now seem just too remote to consider. For the 20-somethings who do start investing for retirement, the good news is that this money can earn 40 years of investment returns, and money you set aside now can greatly improve the odds that you can retire comfortably.

Unless you were desperate for money, cashing in the 401(k) from that job you left two years ago was the wrong move. You owed income taxes and a 10-percent penalty tax on that money netting you roughly 70 cents on the dollar. Don't make that mistake again.

If your current job doesn't offer a retirement plan, you can still contribute to a Roth or traditional IRA. There are income limitations on who can open a Roth IRA and limits on the deductible contributions for a traditional IRA that are also based on your income levels. IRS Publication 590, Individual Retirement Arrangements, has more information. Or discuss it with your tax professional if you're uncertain about your ability to contribute to these accounts.

You have myriad choices when it comes to where you can open an IRA account, but the basic three are: banks, brokerages or mutual-fund companies. Whichever is right for you depends on how you feel about the risks associated with different investments.

Certificates of deposit, for example, are very safe investments but don't offer the potential appreciation of an investment in stocks. In general, the longer your investment horizon, the more willing you should be to take on some risk. With 40 years until retirement, your investment horizon is far enough off that you wouldn't want to limit yourself to investing in CDs.

My rule of thumb is to start out concentrating your investing in diversified investments. Two good choices are a nice hybrid mutual fund that invests in both stocks and bonds or an investment in a no-load index mutual fund. My preference is to deal directly with a mutual fund company versus setting up a brokerage account to buy mutual funds. The earlier Dr. Don column, "A primer on mutual funds," has more information about investing in mutual funds.

The key is to get started. The money doesn't have to stay in the same place forever. If you want to move it somewhere else later, it's fairly simple to do. Don't let indecision over where you should invest keep you from setting up an account.'s corrections policy-- Posted: Jan.20, 2006
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