Millennials are 40 percent more likely to have no savings than members of Generation X. Fortunately, members of the millennial generation can take steps to turn this trend around. Here are some tips on how to start investing for workers still in their 20s:
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, financial planner and Three Oaks Capital founder, it’s important that investors in their 20s limit the fees they’re paying. 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.
Get the full match
Individuals who don’t contribute enough to get the full match are effectively leaving free money on the table. If your company does offer matching contributions, make sure to contribute at least enough to get the full match. Then, slowly increase your contributions as you are able.
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). The Roth 401(k) is funded with after-tax contributions, and once age 59½ is reached, distributions are tax-free. Additionally, the Roth 401(k) option allows for a larger contribution than a Roth IRA.
Use target date funds carefully
Target date funds are usually composed of diverse mutual funds and targeted to the years in which investors will reach normal retirement age. The funds with the longest dates will be the most aggressive in terms of their allocation to stocks, with investments becoming more conservative over time. As an investor, it’s critical that you understand how the target date fund distributes your wealth.
Consider taking some risks
Investors in their 20s have many years to go before retirement and can afford to take some risks. Consider allocating more money to stock-based investment options 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, despite fluctuations in the market.