retirement

Plan retirement in 20s to reap big rewards

Don Taylorq_v2.gifDear Dr. Don,
I am a 26-year-old working professional and know I need to start saving for my retirement. I have been putting off doing it because I don't know how to begin or what I should be doing first. My parents want me to pay down my few debts, but I would rather start saving now.

My debts include a $214,000 mortgage at 4.5 percent, a $15,000 home equity line of credit at 4 percent and $18,000 in student loans at 1.6 percent. I don't owe anything on my car or credit cards, and my home is worth about $300,000.

My employer offers a 401(k) plan but doesn't offer any matching contribution.

I have between $500 and $1,000 a month that I can put into savings or investing or toward paying down my debt.

What advice would you have for a young adult on how to begin investing? Also, how does someone decide whether to pay debt first or to save?
-- Merissa Methinks

a_v2.gifDear Merissa,
Looking at the relatively inexpensive cost of funds on your loans, I'll side with you on this one and say you should get started in investing for retirement. As interest rates head higher, you may want to reconsider the split between retirement investments and debt repayment. But right now, you might as well make hay while the sun shines.

It's tough for people in their 20s to make saving for retirement a priority. There are so many other competing financial goals. But it's the money you put aside in your 20s that has the longest investment horizon until retirement. An early start makes it easier to reach the goal of a comfortable retirement as shown in the table below:

Value of saving early
AgesAnnual contribution to
Roth IRA
Value at age 67 if returns
average 7 percent
26-67$5,000$1,233,882
36-67$10,463$1,233,882
46-67$23,531$1,233,882
56-67$64,464$1,233,882

An earlier column, "Retirement investing in our 20s," provides an overview on deciding how to invest the funds. Because your employer doesn't provide matching contributions, you aren't wedded to its 401(k) plan. You should choose between a Roth IRA and a traditional IRA.

The Bankrate Roth vs. traditional IRA calculator can help you make that decision. Talk to your tax professional if you can't decide between the two accounts.

Bankrate's content, including the guidance of its advice-and-expert columns and this Web site, is intended only to assist you with financial decisions. The content is broad in scope and does not consider your personal financial situation. Bankrate recommends that you seek the advice of advisers who are fully aware of your individual circumstances before making any final decisions or implementing any financial strategy. Please remember that your use of this Web site is governed by Bankrate's Terms of Use.

To ask a question of Dr. Don, go to the "Ask the Experts" page, and select one of these topics: "Financing a home," "Saving & investing" or "Money." Read more Dr. Don columns for additional personal finance advice.

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