The young generation in the work force is urged to create smart investments despite news reports showing retirement funds draining away. Those in their 20s and 30s may have parents who are struggling with their own portfolios. So at the start of their careers, they face a crucial task: forming a retirement plan that will survive tough financial eras and thrive in the near future.
Workers in small and large companies often enjoy the advantage of human resources departments providing them with information on company-sponsored 401(k) plans. Young workers who wisely acquire professional financial advisers can start to build their own fledgling nest eggs with advice on the most current rules and benefits of such investment plans as Roth IRAs. Staying current is crucial because tax laws change all the time and caps vary from year to year.
Financial experts and authors address the young worker demographic with some inspiring news about how investment plans established now can weather economic storms and provide financial advantages down the road.
According to a recent study by the Employee Benefit Research Institute, many young workers do participate in company-sponsored 401(k) plans. In 2008, 49.8 million Americans had established 401(k) plans, accounting for assets of more than $2.3 trillion. Fifty-three percent of these workers were in their 30s, and 13 percent of these workers were in their 20s.
The average account balance among 401(k) participants amounted to $53,464 in 2007 and $39,883 in 2008 for workers in their 30s (reflecting the tightening of belts in the latter year). For workers in their 20s, the amounts were $22,851 in 2007 and $18,598 in 2008, again a slight dip but still a nice balance. Among workers in their 20s with salaries between $20,000 and $40,000 a year, the average 401(k) amount was $4,757 in 2008.
According to Brian Jones, a certified financial planner and author of "Getting Started: The Financial Guide for a Younger Generation," "if you're a 20-something, you have the most to gain from the effect of compounding over time." Even with lower interest rates and with some companies putting temporary halts to matching funds, smartly allocated funds work for the young worker.
The biggest question most young workers face when researching their options is which plan to get. Jones has advocated making a 401(k) more equity-based. "I'm not a big fan of being 100 percent in (stocks)," he says. "But 80 to 90 percent in equity is probably not a bad allocation." Jones advises not to worry about what the market is doing now. "It has absolutely no bearing on how you will be doing 40 years from now."
The next question young workers often pose is: "How much should I put into the 401(k)?" Jones answers with a realistic take: Although the financial industry often advises allocating 10 to 15 percent of your paycheck, younger workers can perform quite well investing 7 or 8 percent per year.
When a financial adviser is consulted, young workers learn about the advantages and realities of Roth IRAs. Simply put, with a Roth IRA plan, you pay the tax now on the money you put in, and it stays in your fund and (ideally) accrues interest. Then you don't have to pay tax on it when the money is withdrawn upon retirement many years from now. Of course, you have to follow the waves and changes that may be imposed upon any financial plan by the Internal Revenue Service or by Congress. A good resource, in addition to an adviser, is the IRS' Publication 590, which will tell you the current figures of how much you can invest in your plans. Contribution caps change often. The publication is available at http://www.irs.gov.
An important warning about investments is that withdrawing money early from a 401(k) carries stiff consequences. You must pay a 10 percent penalty, as well as income tax, on the amount you withdraw, and some 401(k) plans require proof of hardship in order for money to be accessed. The same goes for early withdrawal of funds from an IRA. According to a report issued by Fidelity, tough times are causing a record number of investors to withdraw funds early from their 401(k) plans. Young workers are strongly urged to avoid withdrawing the money they place in retirement funds, to look upon those funds as vital tools for the future.
A quality financial planner found through referrals from trusted sources can explain the detailed differences between traditional versions of investment plans and specialty plans -- such as "lifecycle" funds, which are tailored to age groups -- to help young workers establish and tweak their smart investments for a good 50 to 60 years of growth and future security. The adviser may suggest getting both a 401(k) and a Roth IRA. Lastly, a crucial step is researching, participating in your money decisions, questioning the financial adviser and being an involved partner in helping your money grow.