As a young investor, you've probably got three or more decades to earn money before reaching a traditional retirement age. 1 Yet, if you're like many young people, you may be thinking more about stability or financial independence than long-term growth potential.
"That may be a mistake," says Robert Payne, a financial professional with Principal ® in Greensboro, North Carolina. Investing too conservatively when you're young may leave you financially vulnerable in the future.
Many employers offer 401(k) and 403(b) plans (some with matching contributions). So it can be easier to get started.
Your 20s and 30s are generally the ideal time to consider investing in stocks and other higher-risk investments via your employer's 401(k) or other retirement plan. Here's why:
Stocks have historically generated strong returns over long periods. 2 What's more, time can be on your side based on historical returns. This means that the earlier you invest the more time you have to potentially see the benefits.
"If you're young, you might not need that money for 30 or more years, so it may benefit you to stay invested in the market," Payne says. "Stocks have historically done well over periods that long."
Inflation is the general increase in prices over time. Even if the dollar value of money in savings accounts never declines, it doesn't mean your money is safe.
Inflation erodes the purchasing power of that money as time passes - sometimes more powerfully than a market decline. At a historically average 3% inflation rate, the value of a dollar you save today will be cut in half in 24 years.
Even accounts that pay a fixed interest rate may lose ground after inflation. Stocks, on the other hand, historically have outpaced inflation - sometimes by a wide margin. 3
A financial professional can help educate you on investment risk, so you can make more confident decisions about investing in a retirement plan. If you're worried about picking the "right" investments, one possibility may be a target date fund (if your organization offers one).
Target date portfolios are managed toward a specific date, which may be the date you plan to retire and expect to withdraw the money. As the portfolio approaches its target date, the investment mix becomes typically more conservative. 4
If you want to retire earlier or later than average, you may want to consider an investment option with an asset allocation more appropriate to your situation.
Followers of the FIRE lifestyle (financial independence, retire early) live ultra-frugally with the goal of retiring as early as their 30s or 40s. But FIRE isn't for everyone.
Isak Knivsland, a 24-year-old user experience designer from Des Moines, Iowa, sees the FIRE community as a benchmark. "FIRE sites and message boards give tips and information on saving and spending," Knivsland says. "But FIRE also incentivizes some weird mindsets. Focusing on financial independence is important, but you just need to find balance."
What's Knivsland's approach to financial independence and investing? A well-stocked emergency fund. "With a full year's worth of fixed expenses, I'm far more comfortable taking investment risk with the money that I set aside for retirement and investing," he says.
Investing aggressively is more than just choosing the right mix of investments. Know what you're investing for and if you're setting enough aside.
"You can't guarantee a certain return, but you do have control over the amount you save," Payne says. "Set a realistic savings goal and stick with it."
Have a retirement account from your employer with service at Principal? Log in to principal.com to see what you're allocating to stocks. First time logging in? Get started.
Already have a financial professional? They can help you figure out how investment risk works with your goals of financial independence. If you'd like to meet face to face, find one near you.
This post was created by Principal with Insider Studios. 1 Based on the Social Security Administration's definition of "full retirement age," https://www.ssa.gov/planners/retire/retirechart.html. 2 Source: Standard & Poor's. 3 Of course, it's important to keep in mind that any investment option is subject to investment risk. Shares or unit values will fluctuate, and investments, when redeemed, may be worth more or less than their original cost. It's possible for any investment option to lose value. 4 Neither asset allocation nor diversification can assure a profit or protect against a loss in down markets. Be sure to see the relevant prospectus or offering document for full discussion of a target date investment option, including determination of when the portfolio achieves its most conservative allocation."
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