According to a recent GOBankingRates survey, a third of Americans currently have no retirement savings. And the problem is worse among millennials.
Fortunately, millennials can take steps to turn this trend around. As a worker in your 20s, you can invest in your employer's 401(k) plan. The main retirement savings vehicles available to American workers, 401(k) plans offer great benefits, provided that employees take advantage of them early.
Here are some tips on how to start investing for workers still in their 20s.
START EARLY
It's important that 20-somethings make investing in their 401(k) accounts a priority. These funds represent quick and easy ways to start investing and saving for retirement. And because the money comes out of your paycheck automatically, you won't spend it on something else.
START SMALL
Millennials are often burdened by college loan debt and other bills that can make it hard to maximize savings.
According to Clint Haynes, financial planner and founder of NextGen Wealth, workers should start small with 401(k) contributions and increase the amount each year by at least 1 percent.
PAY ATTENTION TO FEES
Different 401(k) plans offer varying investment menus, but most provide at least one low-cost index fund option. According to Grant Bledsoe, a financial planner, it's important that investors in their 20s limit the fees they're paying.
An SEC study showed that the impact of fees can be significant. On a $100,000 portfolio, a 1 percent increase in annual fees eroded the value by almost $30,000 during a 20-year time frame.
For best results, choose low-cost index funds with low fees.
INCREASE EACH YEAR
Contributing the maximum of $18,000 per year to a 401(k) is a great way to increase your overall savings. If you're struggling to come up with this investment, consider using your annual bonus or raise.
Said financial adviser Peter Huminski of Thorium Wealth Management, "Far too many people get a raise every year and don't use part of it to increase their 401(k) contributions. This is a big mistake. You won't even miss 1 percent of your raise because you didn't have it last year. "
AS MUCH AS POSSIBLE
While many 20-somethings will not be able to contribute the full $18,000, they should invest as much as possible.
Todd Tresidder, money coach at Financial Mentor, said, "Just max out your tax-deferred retirement contributions from your first paycheck. That's all. You can learn all about investing and asset allocation later, but you can never recover lost time, so start now by maxing out your contributions."
Also, contributions made early in your career have a longer time to enjoy compounding interest over the course of your working life.
GET THE FULL MATCH
Individuals who don't contribute enough to get the full match are effectively leaving free money on the table.
Said Huminski. "This is a big mistake. First off, they might be missing a matching contribution that the employer will put in on their behalf. This can be anywhere from 2 percent to 6 percent or more of their salary. That's free money they are missing out on. Second, they are missing out on the power of compounding. "
CONSIDER THE ROTH OPTION
Many 401(k) plans offer options to direct the payroll deferral portion of contributions to a Roth 401(k) account. Any matching contributions made by the company will still go to a traditional 401(k).
Joseph Carbone Jr., financial advisor with Focus Planning Group said, "The Roth 401(k) is funded with after-tax contributions, and once age 59 and a half is reached, distributions are tax free.''
Additionally, the Roth 401(k) option allows for a larger contribution than a Roth IRA, which also has income limitations. Because individuals in their 20s are less likely to be in high tax brackets, Roth contributions might make more sense for them.
USE TARGET DATE FUNDS
Target date funds are professionally managed accounts, usually composed of diverse mutual funds and targeted to the years in which investors will reach normal retirement age. Target date families, such as the Vanguard Group, T. Rowe Price and Fidelity, all offer their funds with target dates in five-year increments.
TAKE SOME RISKS
In the context of 401(k) investing, taking risks means allocating more money to stock-based investment options within the plan or to a target date fund with a long date. These longer-dated funds will have the highest allocations to stocks and are more likely to pay off over time.