:: The Money Guide for Young Investors ::

According to The Retirement Security Project, in 2004, more than half of all households had nothing saved in an employer-based 401(k)-type plan or tax-preferred savings account. Among those households headed by adults aged 55 to 59, half had $15,000 or less in savings earmarked for retirement. Perhaps the individuals surveyed felt they had plenty of time to save and invest for retirement, but never got around to it.

If you’re like most people, you usually don’t have much spare cash to invest. One solution is to pay yourself first, instead of investing what’s left over at the end of the month. Your goal, especially after you start working, is to implement a forced savings program. Money is saved and invested before you get your hands on it. Best of all, you never feel like you just reduced your disposable income by saving. You view your income as your take-home pay.

With these automatic transfers to investments of your choosing, you are able to save and invest painlessly for retirement.

The dollar you save now has decades longer to grow than the dollar you invest in your forties. If you put that dollar in an IRA, the earnings grow in a tax-sheltered account.

	Age Begin Investing $2,000/yr into IRA	Age End Investing $2,000/yr into IRA	Value of Investment at Age 65 (with 8% return)
Scenario 1	21	30	$462,648
Scenario 2	31	65	$372,204

You don’t have to wait until you get a full time job to begin investing in an IRA. You can make a contribution based on earnings from part-time work or a summer job. If you open a Roth IRA and follow the rules, all of your withdrawals will be tax-free someday. If you invest in a traditional IRA, you get a tax deduction now but you’ll pay taxes on withdrawals after you retire.

Inflation makes investing for retirement more complicated, especially for younger investors. With an inflation rate of 3 percent, items costing $50,000 today will cost $121,367 thirty years from now. With an inflation rate of 4 percent, you’ll need $162,170 to equal the purchasing power of $50,000 today.

Conservative investments aren’t risk-free. They may leave you with less purchasing power, even though you make money on paper. Based on the historical performance of the market, investing in stocks gives you the best opportunity to stay ahead of inflation and not lose purchasing power. Unfortunately, history doesn’t guarantee that you’ll make money in the short run or for any time frame.

As you interview for jobs, here are few pertinent questions to ask a prospective employer about your benefits:

Starbucks, for example, allows employees who are age 18 or older to participate in the company’s 401(k) after 90 days of service. Depending on how much the person saves and how long he or she has been with the company, Starbucks will match some or all of the employee’s contribution. In some instances, the company’s contribution may be even higher than what the employee is contributing. Wherever you work, make the most of your employee benefits such as a retirement savings plan.

Retirement savings plans differ as to when the employee is vested. Depending upon your plan, you’ll need to be employed for a certain time frame before you’re entitled to keep your employer’s contributions to your account. It might be a few years or even a few months. If you leave before you’re vested, you keep your own contributions but lose your employer’s.

Investing in the right mixture of investments is extremely important. Asset allocation is a process for splitting your money among different types of assets such as stocks, bonds and cash. This investment strategy is based on the assumption that various investments will do well at different times. Asset allocation is based upon your financial objectives, age and risk tolerance.

If you’re just getting started, you probably have very little money invested, so asset allocation isn’t an issue. As your money grows, however, it’s important that you diversify your assets, so you’re not depending on one or two investments to build your fortune.

There’s a rule of thumb that suggests how much of your assets should be in stock. You subtract your age from the number 100. The result is the percentage of your assets that should be invested in the stock market.

Current Age	How Much Should be Invested in Stocks
20	80%
30	70%
40	60%
50	50%
60	40%
70	30%

For example, a 25-year-old should consider having 75 percent of his or her assets in the stock market, since 100 minus 25 equals 75. On the other hand, a 70-year-old might want to limit his or her stock holdings to 30 percent, the figure you get after subtracting 70 from 100.

You should diversify further within each asset class. For instance, you might further diversify your stock portfolio with growth stocks, value stocks, mutual funds, and index funds. Index funds invest in securities that make up an index like the S&P 500 or the Dow Jones Industrial Average.

The key to asset allocation is that you must rebalance your portfolio periodically. For example, if the stocks in your portfolio have increased in value by a substantial amount and you now have too much money tied up in the stock market, you should rebalance and add to your other investments.

A big mistake many people make is that they underestimate the importance of putting money away, no matter how small the amount is that you have to invest. You should sign up for your employer’s 401(k) retirement savings plan as soon as you’re eligible, even if you can only put away one or two percent of your paycheck. As you receive salary increases and bonuses, you should consider raising your contribution level.

Another mistake to avoid is cashing out your 401(k) if you leave the company. If you do, you’ll pay taxes and a premature distribution penalty. One option is to transfer your 401(k) to your new employer’s plan.

Another option is to transfer the money from your 401(k) to an IRA, a process that is known as a rollover of your account. By rolling over your 401(k) to an IRA, you won’t pay taxes or a penalty on the transfer.

Many employees make the mistake of investing too much money in their employer’s stock. If your employer runs into financial problems, the stock is likely to go down in value. Worse yet, you also lose your job. The recently enacted Pension Protection Act makes it easier for you to sell company stock in a 401(k) and diversify your investment.

As you begin your career, find out when you’re eligible for your company’s 401(k) retirement savings plan, if it has one. Mark on your calendar when you’re eligible to participate and sign up as soon as possible.

Companies are now permitted to automatically enroll employees in their retirement savings plan, but you can opt out. The Pension Protection Act also allows your employer to put your contribution into a specified investment. Instead of opting out of a 401(k), contribute as much as you can and select the investment option that best meets your goals.

If you have earnings from a part-time job and your tax bracket is low, open a Roth IRA. You can check out the Web site of mutual funds to find out if there are fees for opening an account. You’ll see that many of them waive the minimum investment if you agree to fund your Roth IRA with automatic deductions from a checking, savings or money market account. You can open a Roth IRA online or by making a phone call. Many brokerage firms also have programs, so you can fund your IRA gradually instead of coming up with a larger amount.

Some mutual funds and brokerage firms will assess an account maintenance charge. Before opening an account, find out how much it is and whether there are ways to avoid the charge. You might bypass the fee by consolidating your investment accounts, taxable and non-taxable, at the same firm. The fee may be waived if you exceed a specified dollar amount. Check with your parents or other family members to see if you can link your account to theirs and avoid the maintenance fee.

In the long run, you’ll be glad you began investing early. To be a millionaire at age 65, let’s crunch the numbers:

Age Begin Investing	Amount You Need to Invest Monthly
20	$135
25	$214
45	$1,498

There are ways to access your retirement savings plan before age 59 ½. Here are some of the possibilities:

You can only borrow against retirement savings plans that permit loans. Even when loans are permitted, there are restrictions on how much you can borrow. Borrowing against your 401(k) has drawbacks such as:

If you invest in an IRA, you can make qualified withdrawals in certain circumstances such as:

When you invest in a Roth IRA, you are permitted to withdraw your own deposits at any time. For example, if you’ve contributed $12,000 to a Roth IRA that is now worth $20,000, you can withdraw your contributions but not the earnings.

There are many investment vehicles to choose from when investing for retirement. The sponsors of 401(k) retirement savings plans owe a legal duty to offer a mixture of investment options. Here are a few options that are typically offered:

Life-cycle funds – These funds are designed to maximize the growth of your investment until a specified retirement year. There will be funds for employees retiring in five years, as well as for those who plan to retire in 40 years. Investments become more conservative as you get closer to retirement.

Stable-value funds – These funds are designed to provide a stable return on your investment with little risk. The money you invest earns a fixed rate of interest for a specified period of time.

Global and international funds – A 401(k) may offer a fund that invests globally or in a particular part of the world.

No matter what choice you make, be sure your portfolio is thoroughly diversified.