Retirement Planning in Your 20s and 30s

by Guest on July 9, 2018

in Benefits

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Is it too early to start planning for retirement in your 20s? The answer is no. As life expectancy continues to increase, planning early can ensure a comfortable retirement. While planning for retirement at this age may be the last thing on your mind, the earlier you start the better chance you have of achieving your retirement goal. An early start also allows more time for your investment to grow through compound interest. In addition to starting early, here are some steps you should consider when planning for retirement in your 20s and early 30s.

Maximize your employer match: Young investors should consider maximizing their employer 401(k) match, since failure to take advantage of this benefit means missing out on free money. Many employers match 25, or even 50, cents per dollar invested by an employee, up to a predetermined maximum contribution percentage. If your employer provides this, make sure to put enough money in your 401(k) plan to maximize your employer match.

Consider a Roth investment: Much like a company-sponsored retirement plan, traditional IRAs are a common investment vehicle. Traditional IRA contributions are not taxed, but withdrawals are taxed. A Roth IRA or Roth 401(k) gives you the option of taxing your contribution up front at the time of investment while the account grows in value tax-free thereafter. This means that withdrawals during retirement are not subject to income tax, provided you are at least 59 1/2 and the account is held for five years or more. This is a great way for younger investors to take advantage of lower tax rates, especially if they expect to be in a higher tax bracket closer to retirement.

Manage your risk: One mistake young investors make is selecting a less-than-optimal stock/bond allocation based on their age. Typically, investors in their 20s or 30s are best advised to select a stock-heavy portfolio with a minimal allocation to bonds.

For investors who feel less comfortable with selecting their own investments, target-date funds can serve as a convenient alternative. Target-date funds start out with heavier allocations to stocks and become more income-oriented as the participant ages. If you are in your 20s or 30s, it might make sense to choose an aggressive portfolio allocation and limit your investment in bonds.

Avoid market-timing: A look back in time suggests that some of the biggest gains in the stock market have followed periods of poor market returns. Investors can make the mistake of timing the market by pulling out of their investments during market losses and buying back when the market has rebounded. Investors who attempt to time the market run the risk of missing periods of exceptional returns. With time on your side, it is best to adopt a long-term approach to investing.

Keep in mind that you should first estimate how much money you may need in retirement as well as determine your current annual expenses such as living, healthcare, and miscellaneous spending before considering the options outlined above. It is always a good practice to track your spending in addition to identifying your savings and investment objectives.

This is for informational purposes only and should not be considered tax or financial planning advice.

401(k) and IRA plans are long-term retirement savings vehicles. Funds grow tax-deferred. Withdrawal of pretax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10% federal tax penalty. Direct contributions to a Roth IRA are not tax-deductible but may be withdrawn free of tax at any time. Earnings may be withdrawn tax and penalty free after a five-year holding period if the age of 59 1/2 (or other qualifying condition) is met. Otherwise, a 10% federal tax penalty may apply. Please consult with a financial or tax professional for advice specific to your situation.

Article contributed by Matisse Capital.
For more information contact Dan Sholian
503-210-3002 | Dan@matissecap.com

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