Even as steady paychecks begin to roll in, young adults face a tough road: a volatile and inherently chancy savings vehicle in investments and a retirement that, although far off, will likely cost an unprecedented fortune. What can you do if you're just starting out?
If you want your money in its most readily accessible form, you're not alone among your peers. A recent UBS report found that 52% of people between the ages of 21 and 36 keep savings invested in cash, far more than all other age groups.
"While [millennials, born between 1980 and 2000] have fewer assets than older generations and may have immediate cash flow needs, the average cash allocation is high (42%) even among older millennials (ages 30 to 36) who have at least $100,000 in assets," the report adds.
Young adults' risk aversion isn't entirely surprising given recent financial events, especially market ups and downs and the frequent bursting of economic bubbles. This outlook can, though, prove to hinder retirement saving even before accounting for inflation's eroding effect .
Here are some tips if you're a young professional beginning to think about retirement planning and investing:
Create a plan . Your outline for financial action doesn't need to be complicated, but a plan helps give you a starting point and create a baseline for measuring your goals.
Consider starting with a site such as Mint to view your complete financial picture. Then document your goals, time horizon, investment objectives and, most important, your action plan. Consult a professional if needed; many financial planners will work with you on an hourly basis .
Maximize retirement accounts . Your retirement accounts (assuming you've started one or more) provide tax-deferred growth, a powerful feature to help boost your long-term returns and income decades from now when you stop working. If your company offers a 401(k) plan, see if your employer matches a portion of your contributions. At the very least, contribute enough to receive the full company match (often around 5% of your pay annually, though percentages vary).
If you are self-employed or don't have a company plan, contribute monthly to an individual retirement account . You needn't start with the maximum contribution ($5,500 annually); you can begin with small, monthly contributions and increase as you get more comfortable with regularly putting away money and, with luck, make more income.
Manage investment costs and taxes . Unlike with the stock market itself, you can temper your investment fees and taxes. The less you pay of each means more money in your pocket or your portfolio. Consider using low-cost exchange-traded funds and index funds to help reduce costs and managers' fees and lower taxes that your returns incur.
Turn off the news. Avoid trading based on news developments. With your retirement still a quarter century or more away, don't let short-term market moves influence your long-term investment plan. Staying focused on your plan can help you avoid costly money mistakes.
Save that bonus. It is tempting to spend - yet a bonus marks a great opportunity to give your retirement account a boost. Consider living off your bonus for a month and defer your full month of regular pay into your 401(k) or retirement account.
Even though the golden years are decades distant, remember: You might spend more than a third of your whole life in retirement. Investing in cash seems to provide some relief from pressing needs right now, but will likely hinder your long-term goals.
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Taylor Schulte, CFP, is founder and chief executive officer ofDefine Financialin San Diego, responsible for company's vision, strategy and execution. He specializes in helping individuals, families and small business achieve their financial goals, from investment management, financial and retirement planning to charitable giving, college planning and insurance services. While he works with a wide range of clients, Schulte has a keen understanding of the millennial generation's financial needs and a progressive, forward-thinking approach. Schulte was recently honored with the 2015 Five Star Wealth Manager Award, a recognition limited to fewer than one in 20 wealth managers in San Diego. He also regularly contributes to theSan Diego Downtown News .
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