Retirement for millennials: Why investing aggressively can pay off
Young investors and stocks may be a good match when it comes to potential financial growth over the long haul. Learn why you might not want to shy away.
Younger investors generally have three or more decades to earn money before retirement. Yet many young people choose to keep most of their money in cash, thinking more about near-term stability than long-term growth potential.
In a 2014 survey from MFS Investment Management, millennials reported holding only 30% of their money in equity, with greater allocations to bonds and cash1.
"That may be a mistake," says Robert Payne, a financial professional with Principal® in Greensboro, N.C. At a younger age, there are potentially more opportunities on your side for long-term financial growth. And with many employers offering 401(k) and 403(b) options, some with matching contributions, it’s easy to get started.
Why you should invest aggressively in the first decade of your career
The first decade of your career—when you’re in your 20s and 30s—is the perfect time to consider investing aggressively in your 401(k) or other retirement plan, meaning investing your savings in stocks and other, higher-risk investment vehicles. Here's why:
1. Time is on your side.
Stocks historically have generated stronger returns than other assets over long periods. What's more, the risk of losses in stocks declines dramatically the longer they're held (which means that the earlier you invest in stocks, the lower the risk of losing money on them overall).
"If you're a young person, the potential for needing that money could be 30 or more years away, so it may benefit you to stay invested in the market," says Payne. "Stocks have historically done well over periods that long."
2. "Safe" money isn't safe from inflation.
The dollar value of money in savings accounts never declines—but that doesn’t mean your money is safe. Inflation erodes the purchasing power of that money over time—sometimes more powerfully than a market decline. At a historically average 3% inflation rate, the value of a dollar will be cut in half in 24 years.
Even accounts that pay a fixed interest rate may actually lose ground after inflation, while stocks historically have outpaced inflation, sometimes by a wide margin.
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.
3. Your plan can change.
An advisor at Principal can help educate you on investment risk, so you can make more confident decisions about investing in your 401(k) or other retirement plan. Once you have an understanding of investment risk and your tolerance for it, choosing investment options may be less stressful.
Another alternative may be a target date fund (providing your organization makes one available). Based on your review of these plans, you can elect a target date fund closest to the year you plan to retire.
Target date portfolios are managed toward a particular target date, or the approximate date you expect to start withdrawing money from the portfolio. As each target date portfolio approaches its target date, the investment mix becomes more conservative by increasing exposure to generally more conservative investments, and reducing exposure to typically more aggressive investments.
Should you choose to retire significantly earlier or later than average, however, you may want to consider a fund with an asset allocation more appropriate to your situation.
And investing aggressively is about more than just choosing the right mix of investments. It's also important to make sure you're investing enough.
"You can't guarantee a certain return, but you do have control over the amount that you save," says Payne. "The most important thing you can do is to set a realistic savings goal, and stick with it."
*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.
Neither the principal amount nor the underlying assets of target date funds are guaranteed at any time, including the target date. Investment risk remains at all times.