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Advice to Young Adults On Saving Early for Retirement

April 2, 2021

By Regan Ervin and Stephanie Klein

It might sound like overkill to some, but saving for retirement in your twenties can make a big difference in your future lifestyle during retirement. Or your thirties. So even if the contributions are small—it’s worth it. 


Start with the goal of a stable and diversified portfolio (diverse means having investments across asset classes AND having a good range within each asset class). Then, don’t touch that money. 


The most significant example of diversifying your investments across asset classes is to choose low-cost, broad market ETFs. Since you’re young, you won’t need to draw from these for a long time—and you shouldn’t. 


In other words, be a long-term investor! Accept what the broad market is doing and don’t interfere. One exception: tax-loss harvesting and rebalancing are not interfering. The truth is, most professional investors underperform the broad markets by interfering under the notion they are adding value.


An essential step to long-term investing is having appropriate savings safeguards in place for emergencies.


Besides utilizing smart investing practices, it pays to utilize the full capacity of your employee benefit package. Be  diligent in optimizing those opportunities: fund your company retirement plan, maximize your Roth contributions, be tax-efficient with which accounts you use. Generally, bonds are tax-inefficient and should be in retirement accounts, but equities are generally more tax efficient and best held in non-retirement accounts.


Outside of these standard offerings, it’s important to not participate in an investing strategy just because people you know are doing it. Many popular solutions are expensive, and often generate fewer returns than low-cost investments. A great illustration of this phenomenon: Warren Buffet once made a million-dollar bet with a hedge fund that he'd make more money over ten years by putting his money in a low-cost index fund than he would with the high-cost hedge fund. Ten years later, he won.


In your own quest to stay smart and profitable, stick to a few simple criteria to sort your options. If you use an advisor, hire a fee-based advisor who has a 100% fiduciary duty to you. Know how they are being compensated. Don’t use them if they get commissions on the products they’re selling. Avoid, avoid, avoid annuities, insurance-related investment products, and commission-driven investments.


Once your plan is in place, automate your investment contributions with monthly transfers from bank accounts. Pretend you don’t have that money and look at your spending options as if your paycheck was the amount after your contributions.  Don't forget—you could be accomplishing as much as doubling your retirement savings by starting now.


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