Young Investors Can Afford to Be Aggressive in 401ks

You've got plenty of time to make up for any mistakes

   
Young Investors Can Afford to Be Aggressive in 401ks

My 30-year-old younger brother just changed jobs, and as a result was presented with a new menu of 401k options.

youngInvestorsB.png Young Investors Can Afford to Be Aggressive in 401ksLike a good big bro, I was happy to help him set a strategy — not just because wading through different mutual funds can be confusing, but also because it was a chance to see his outlook on retirement as a young investor.

“Your goals will define the best funds to pick,” I said. “So what are you looking to do here? Build a conservative long-term retirement plan you can stick to, or be more aggressive and short-term?”

“Option B,” he said. “I have time to take some big risks for big reward. I’d rather screw up now when I’m small-time then screw up big-time at 55 and ruin my retirement.”

“We can do that,” I told him. “But it’s on you to keep an eye on things and make sure you’re on track — and more importantly, recognize when it’s time to change strategies in a few years.”

“No problem,” he said, “I like watching this stuff. And who stays at a job for two decades anymore anyway? Chances are I’ll have a new 401k plan in five years and we can do this all over again with a less risky strategy.”

It’s Hard to Save Long-Term with Short-Term Job Prospects

That sentiment of perpetual job seeking is one that I think a lot of 20-somethings and 30-something share. The idea of staying in one job with one set retirement plan is almost laughable. Things change, and while it’s important to think long-term, it can be counterproductive to make a plan you know won’t be built to last.

William Chambers, CEO of Executrack, writes that “the work-for-life model no longer exists” for those folks born after 1979. “In fact, the average job tenure is down to four years and expected to change even faster,” he notes.

With that in mind, you’ll have a new retirement plan (presuming your 401k is your primary retirement plan, as it is for millions of Americans) pretty frequently. And since every 401k plan offers different options, it might be impractical for you to think decades down the road.

Besides, if the Great Recession taught us anything, it’s that the market can move quickly — and it’s important to give your retirement portfolio regular check-ups. Even with the luxury of a job that lasts 30 years, you should regularly keep tabs on things and adjust your strategy as you age.

The Time to Take Risk Is When You’re Young

Another important point my brother makes is that you can afford to chase returns now because retirement is so far away.

If you screw up, you have plenty of time to make up for any mistakes. And if you get things right, you’ve quickly primed the pump for retirement and it will be easier to stay on track.

Being conservative might protect your cash should things sour, but the flip side of playing things too close to the vest is that you won’t grow your savings fast enough — or that you’ll have to keep working longer to retire with the amount of money you have in mind.

Given the power of compound interest, squeezing out just a few hundred dollars more in the early years of retirement planning can deliver huge returns down the road.

Let’s say over the next 10 years you manage to sock away $10,000 in retirement savings. If you continue to save an extra $1,000 a year for 20 years and generate 10% returns annually, you’ll finish with $130,277.

On the other hand, if over the next 10 years you manage to sock away $15,000, saving $1,000 more a year for 20 years at a 10% return finishes you at $163,915.

And if you can hurry up and get to $20,000 in 10 years? Then saving $1,000 more a year for 20 years at a 10% return yields $197,552.

Savings
by 2023
Continuing Contribution Rate of Return Nest Egg by 2043 Amount over $10K Additional Return
$10,000 $1,000/year 10% $130,277
$15,000 $1,000/year 10% $163,915 +$5,000 by 2023 $33,638
$20,000 $1,000/year 10% $197,552 +$10,000 by 2023 $67,275

Check out the chart above for another way of looking at the data. But in a nutshell, the more money saved early on, the better by far your nest egg will be — because each year that initial sum gets put to work. An extra $10,000 earned now can be worth more than $67,000 by the time you retire thanks to the power of growing your money over time.

Obviously there’s nothing wrong with a slow-and-steady-wins-the-race approach. But if you know you are going to constantly have your 401k plan in flux because your job is constantly in flux, and if you are willing to take bigger risks in the short-term with the hope of getting up to speed faster on your retirement savings … well, there’s nothing wrong with being a bit more aggressive with your 401k allocation.

Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. 

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Article printed from InvestorPlace Media, http://investorplace.com/2013/07/young-investors-can-afford-to-be-aggressive-in-401ks/.

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