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Considerations In Your 20s

Start thinking ahead

Smart habits now could benefit you later

In your 20s, the best thing you can do is start saving.

When you start saving now, your money has a chance to grow. Small amounts you save each month can grow into much larger amounts later, especially 30 or even 40 years from now.

Here are three easy steps to get you started:
  1. Determine how much to save
  2. Choose your investment options
  3. Enroll in your company’s retirement plan
1. Determine how much to save
Pay yourself as much as you can afford to save. Select an amount you’re comfortable with and can afford. Then commit to increasing it over time. The important thing is to get started — there is a cost to waiting.

Additionally, your employer may match the amount you are contributing to your retirement plan. This is free money you don’t want to pass up. Try to contribute at least up to the match amount.

Consider opening an IRA or Roth IRA as an additional way to save for retirement.
2. Choose your investment options
There are two basic factors in this decision:
  • Your desired reward
  • Your tolerance for risk

The return on your investments is your reward. Typically, the greater the reward, the greater the risk you’ll need to take. Selecting where to invest your money is a decision about the trade-off between risk and reward.

In your 20s, try not to be too conservative with your investment selections. Many people make the mistake of being too conservative with their savings even though they won’t need the money for 30 or 40 years from now when they retire. When you’re just starting to save, one of the biggest risks you have is not earning enough to outpace inflation.
A key strategy to managing risk and reward is asset allocation
Asset allocation is the “big picture” — the framework in which you’ll make your investment decisions. It’s the way you divide your contributions among the three basic investment categories: stock funds, bond funds, and stable value investments. Knowing what kind of investor you are, or your investor type — conservative, moderate, or aggressive — may be a good starting point for determining an asset allocation that works for you. For help figuring out your investor type, take our Risk Tolerance Quiz.

Once you’ve determined an appropriate asset allocation strategy, you should familiarize yourself with the investment options offered in your retirement plan. Typically, stable value investments offer little chance that they will lose money, but their potential for gain is limited. At the other end of the spectrum, stock funds generally have the greatest potential for gain, but they can also be volatile and may sometimes decrease significantly in value.

Most plans offer two categories of investments:
  • Single-style funds, such as stock funds, bond funds, and stable value investments
    Most plans offer a number of different single-style funds to choose from. Performance of these funds will fluctuate up and down as investment styles change. Therefore, you’ll want to diversify or spread your contributions among the different funds in your plan according to your asset allocation strategy.
  • Asset allocation options, such as risk-based balance funds or target date funds
    Asset allocation options may offer an “all-in-one” investment solution. With these investments, the asset allocation and diversification is built in. Target date funds are mutual funds that automatically adjust your asset allocation to become more and more conservative the closer you get to retirement (the “target date”).
3. Enroll now in your company’s retirement plan
Put time on your side and the power of compounding. Take advantage of your retirement plan’s tax-deferred benefits and the matching contributions your company may provide. The best step you can take is to begin saving as soon as possible. Enroll today!

For more information, including a list of tips and ideas to help you save and plan for retirement, visit our retirement checklist for your 20s.
 
Recordkeeping, trustee and/or custody services are provided by Wells Fargo Institutional Retirement and Trust, a business unit of Wells Fargo Bank, N.A. This information is for educational purposes only and does not constitute investment, financial, tax or legal advice. Please contact your investment, financial, tax or legal advisor regarding your specific needs and situation.