I can vouch for this: Personal finance writers field plenty of cocktail-chatter questions about managing and investing money. That's certainly true for Mark Bruno, a 30-year-old reporter who writes about retirement and investing for Financial Week. Inspired by questions from friends, family, and peers about getting started with their retirement savings, Bruno wrote Save Now or Die Trying: Achieving Long-Term Wealth in Your 20s and 30s, which he says offers pointers on "saving the right way." Here, he shares a handful of those tips:
How do you know if you're on the right track with your 401(k)?
Everyone has different incomes, debts, and lifestyles. It's too difficult to say that a certain level of savings means you're on track—because while it might be true for some, it may be totally meaningless to others. Plus, if you're 30 to 40 years away from retiring, you should just be concentrating on how you're going to start saving, and not what it will take for you to stop.
It's important to consider, too, what you'll be giving up if you don't start saving in your 20s and 30s. Consider this example, which is included in the beginning of my book: Say you're 40 years old, you make $50,000 a year and you have no money saved for retirement right now. You want to retire at 65 and you can't live on less than $40,000 a year. If you put away 10 percent of your salary now until you turn 65, and you get pretty good returns on your investments (let's assume 9 percent), your retirement savings will run out at the age of 73 if you withdraw $40,000 each year after you have retired.
Now look at the same scenario for a 30-year-old today. Same salary, same contribution to retirement, and same returns on investments. If the 30-year-old also retires at 65 and withdraws $40,000 a year for retirement, his savings will last him until he turns 84.
He put away 10 percent of his annual salary for 10 more years than his 40-year-old counterpart, and the 30-year-old can now fully support himself for 11 more years of his life.
Numbers don't lie—you're young now, and your ability to turn small amounts of money into considerable amounts of wealth will never be greater.
Roth 401(k) or traditional 401(k): Should you split your contributions 50-50?
If a company matches your contributions to a Roth 401(k), their match is going into a traditional 401(k), while your direct contributions go into the Roth option. So you're already getting the 50-50 if that's your setup. Don't make things too complicated. For one, there's a pretty good chance that the Roth 401(k) isn't even an option at your company—only about 10 to 15 percent of employers currently provide their workers with this 401(k) option. But even if it's available, consider your current income level. The Roth 401(k) is a bet on your tax situation. If you think you'll be in a higher tax bracket when you retire than you are right now, then the Roth 401(k) makes sense. So if you're young and not making a lot of money, it's worth asking if the Roth 401(k) is an option.
What tips would you offer investors perusing their 401(k) fund offerings?
Again, my advice is to always keep it simple. If you are young and just starting out, don't get too caught up in index versus active management, or mutual funds versus ETFs. Consider two things: cost and diversification. You'll almost always be better off choosing the fund with the lowest fees over the fund with the best past performance. The fees will follow you for years and will eat away at your earnings—just consider fees a negative return on investment. When you're starting, think passive funds that are inexpensive and get you broader, more diversified market returns.
Percentage-wise, how much should you be contributing to your 401(k)?
There are all these rules of thumb that say you should be saving 10 to 15 percent of your income for retirement. Again, keep it simple: Contribute enough to get the full company match, whatever it may be. Typically, most companies will offer some kind of match, and it's often up to 6 percent of your pay. Try to get as much of this free money as possible, if you're capable. If your company doesn't match, first, send them an E-mail and tell them that they should. If they don't, consider your income level and cash-flow situation. If you have the means, you may want to put up to 10 percent of your pay into your 401(k). If you're tight on cash, shoot for 3 percent and try to increase your contributions as you pay off any debts, or when you hopefully get your next raise. Remember, these contributions are made using pretax dollars, so your contributions will lower your annual taxable income, too.
What about investing for other things, such as a house?
Most young people—myself included—have a lot of work to do just to establish the foundation of a portfolio. It's tough when you have a lot to do but not a lot of money to do it with. The 401(k) is a great starting point, because you're getting some help from your employer, plus you're also getting some free money and some nice tax benefits. But after the 401(k), I think a Roth IRA is a great way to save for your retirement—and also any other up-and-coming life expenses at the same time. For one, you can start saving in a Roth IRA at any age, you just need to have some legit income to get going. And the earlier you start, the more you can save, of course.
The Roth IRA is also a really flexible account and is an excellent hedge when you're not sure exactly what to save for; for example, you can take out your contributions at any point without a penalty and without paying taxes on the withdrawals. So if you're in bind and need some cash in an emergency, your Roth could be a decent option.
But the Roth IRA also allows you to take up to $10,000 (including earnings) for the purchase of your first home. So for a lot of young people who are trying to save up to buy a house, this is a way to put your savings—plus some tax-free earnings—toward a major, and critical, life purchase if you need it. Plus, if you're married and your spouse has a Roth IRA, you can take out another $10,000 toward the purchase of your first home. Not a bad amount when you're saving up for a down payment.