It's a Big, Open Road in Your 20s: Find the On-Ramp to Financial Independence
2. Build an emergency fund. Maybe it's a brake job for your car. Or it could be more serious, such as an underinsured illness. Experts recommend squirreling away six to eight months of cash to cover essentials, such as rent, food, transportation, taxes and utilities.
3. Contribute to a Roth IRA. Open a Roth IRA while you're young. That's because when you're in a lower tax bracket you pay less tax on your up-front contributions. You also may be able to tolerate more risk when you're young for greater potential long-term gain. If you set up a Roth when you're 20, invest the maximum of $458.33 per month, and earn a hypothetical average annual return of 8%, you'll have $2,216.799 saved tax-free when you retire at 65.1
4. Stock more away in your 401(k). Contribute up to your employer's maximum matching contribution (if one is offered in your plan). Any money you save above that amount should go toward maxing out the Roth IRA or adding to your emergency fund.
Abby and Bill, both age 25, participate in a 401(k). The plan offers a 50% matching contribution up to 10% of employee pre-tax contributions. Both employees make $35,000 a year. If Abby contributes 5% of her pre-tax income to the plan each year and earns a hypothetical 8% annual average return in addition to the employer's match, she will have saved $704,611 by retirement at 65. But Bill, who contributes 10% to his account and earns the same rate of return as Abby, takes full advantage of the maximum employer match and will in theory boost his savings to $1,409,222 when he retires--nearly double the amount ($704,611) of Abby's savings.
As always, the real key to retirement success is saving more and spending less. By managing debt and saving regularly while you're in your 20s, you can leverage the positive power that time and compound interest can have on your investments.
One Route That May Simplify Your Investing
Some investors who lack the time or interest to invest on their own may benefit from a "do it for me" approach. Some plans offer the option to invest through an advised separately managed account (SMA), a custom portfolio that reflects your specific circumstances and goals. With more flexibility and investment choices, an SMA allows you to work closely with a financial advisor to create a portfolio that's matched more directly to your needs.
1This hypothetical example is intended to illustrate the concept of after-tax investing through a Roth IRA, not the performance of any investment. All investing involves risk, including loss of principal. No investment or administrative fees were deducted from the hypothetical investment; had they been deducted, returns would have been lower.
Disclosure: This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. LPL Financial and its advisors are providing educational services only and are not able to provide participants with investment advice specific to their particular needs. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.
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c 2014 Kmotion, Inc. This newsletter is a publication of Kmotion, Inc., whose role is solely that of a publisher. The articles and opinions in this newsletter are those of Kmotion. The articles and opinions are for general information only and are not intended to provide specific advice or recommendations for any individual. Nothing in this publication shall be construed as providing investment counseling or directing employees to participate in any investment program in any way. Please consult your financial advisor or other appropriate professional for further assistance with regard to your individual situation.
3Q 2015 Plan Participant Newsletter