Dear Dr. Don,
At age 24, I recently started a job working for a corporation. I'm interested in individual retirement accounts. I'd like to look at investing in stocks and bonds and learn more about choosing a 401(k) plan. I don't have many expenses. At the moment, I'm living rent-free and making about $60,000 annually.
How should I start to invest? What should I look for and with whom should I start the conversation on retirement savings?
I'd like to retire in a very comfortable position, perhaps even earlier than age 65. My thinking is that I need to make investments for both the short term and long term. Please help me to know where to start.
-- Char Capital
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Good for you! It's hard for adults in their 20s to make investing a priority because they have so many different financial goals competing for that income. By starting soon, you'll get an added benefit of compounded interest from your investments. Simply put, that's the benefit of added time to help your investments gain value.
You don't really have a choice of 401(k) plans once you are in a particular job. If your employer offers a 401(k) plan, it is the only choice. It is possible that you have a choice between a Roth 401(k) and a regular 401(k). With the Roth, you contribute after-tax dollars to the plan. With a regular 401(k), you contribute pretax dollars. With both, any employer matching contribution is made with pretax dollars.
The choice you do have is how it's invested. Keep an eye on fees and expenses. In general, one or two low-cost, indexed mutual funds investing in stocks and bonds beat a collection of higher-cost mutual funds. A target-date fund is a good place to begin. The target date approximates your planned retirement date. Check to see whether your employer offers 401(k) counseling. That can help you learn more about your investment choices.
If your company offers a matching program, you'll want to contribute up to the limit of the match, at a minimum. The typical program offers 50 cents for every $1 you contribute up to a certain percent of salary, usually 6 percent. If you contribute 6 percent of your salary, your employer contributes 3 percent and you "earned" 50 percent on your money before even deciding how to invest it.
You're wise to recognize short-term financial goals along with those for the long term, including retirement. Short-term investing often focuses more on retaining principal, since you don't have the luxury of time to recover potential investment losses before using the money for your short-term goal.
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