Just Starting Out: In Your 20s through Early 30s

Retirement may seem a lifetime away, but investing in yourself now pays big.

By Taylor Mallory

If you’re like most women just starting out, you’ve landed the job of your dreams – or the job you’ll need to get there – and are planning for your near future: building your professional wardrobe, working nights and weekends to get  your supervisor’s attention, planning your wedding (or your best friend’s), deciding whether or not to have children and maybe even buying your first home. Retirement could be three or four decades away, so it doesn’t need to be near the top of your priority list, right?

Wrong, say many experts. They predict you will need at least 70 to 80 percent of your annual preretirement salary during each year of your retirement to ensure a comparable lifestyle. Since women tend to live significantly longer than the men in their lives, you’ll probably need a substantial amount. And Social Security, even in combination with a 401(k) plan, will not be enough.

But there’s good news: If you start now, time is on your side: You can save without putting a major crimp in your lifestyle.

So how can you accumulate the savings you’ll need? Here’s what to consider as you plan:

1. Grow your savings. Many women ignore the whole retirement savings issue, assuming they’ll never be able to save enough to matter. But by starting this early, even $50 to $100 a month adds up, thanks to the power of compounding – which earns interest on the money you invested and the money earned from investing. Start an automatic savings plan (out of sight, out of mind) that takes just 10 percent of your income each month. You’ll barely miss it, but it will immediately go to work for you.

Do you have a high level of credit card or other debt? If so, start a program to pay it down before increasing or beginning your retirement savings. The interest rate paid on your existing debt may be far higher in the long term than the rate of return received on your retirement investments. After addressing your debt situation, make savings a priority.

Are there unnecessary daily expenses that you could cut or limit? And as annoying as it may be when the men in our lives ask, “Do you really need another pair of black strappy shoes?”, it may be a valid point. Sometimes a woman really needs to treat herself, but try to avoid frequent impulse shopping. Given a few days to think about it, maybe you’ll decide you don’t need those shoes after all. And think how much money you could add to your savings each year by avoiding the urge to buy just one pair of Manolos.

2. Contribute to your employer’s retirement plan. Your employer’s contribution is free money that you don’t want to pass up. Plus, the government offers tax incentives on retirement savings plans.

• Tax advantage: Money you contribute is generally pretax, and any earnings are free from taxation until you begin withdrawing.
• Diversification: There are typically a wide range of different types of investments from which to choose. Diversification and good asset allocation may help you reduce the risks of investing.
• Employer contributions: Many retirement programs offer either direct employer contributions on your behalf or contributions that match what you put in. These contributions are not taxed until withdrawal.

Contact your employer to find out about retirement plan(s).

For larger employers

• Defined contribution plans such as a 401(k): If you’re an employee, you can contribute a portion of your salary on a pretax basis – and most employers will fully or partially match your investment. Contributions are typically invested in a range of investment options approved by your employer. 
• Defined benefit plan: This is an employer-funded – and controlled – plan that provides a fixed benefit when you retire.

For smaller employers

• SEP-IRA: If you work for a startup or small business, your employer can make contributions – but you control how your funds are invested.
• Simple IRA: You can invest part of your salary before taxes, which many small business employers will match – and you control your investments. 
• Profit sharing/money purchase pension plan: Under this plan, your employer contributes to your retirement fund and either allows your complete control of investments or allows you to choose from selected investment options.

3. Open an IRA. Supplement your employer-sponsored plan with an IRA, which also provides tax advantages – as well as diverse investment choices you make for yourself.

Traditional IRA: The government allows you to contribute up to $4,000 per year  (increasing to $5,000 in 2008) – and the investment may be tax-deductible. Earnings are tax-deferred, which increases your earning power.
• Roth IRA: These allow you to make the same level of contributions as the traditional IRA. While there is no tax deduction for the contribution, the earnings are typically tax-free. Additionally, while you’ll want to leave the contributions in to maximize earnings, you can actually withdraw the original contributions without taxes or penalties if you find yourself in an emergency situation and need the funds. 
• Rollover IRA: Consolidating funds from a previous employer’s retirement plan into a traditional IRA allows you to preserve the tax benefits – without penalty. If you change jobs, be sure to bring the money with you this way, rather than paying the fines for cashing out early.
• SEP-IRA: If you’re self-employed or a small business employee, this plan allows you to enjoy the tax-deferred growth potential of an employer-sponsored traditional IRA.

4. Start investing. Once you’ve decided where to invest your retirement savings, consider how to invest.

Here are a few options:

• Traditional savings: Unlike stocks and bonds, traditional savings accounts (i.e., money market deposit accounts and bank CDs) are FDIC-insured and preserve your principal investment amount. Return on investment may be much lower than with more risky options.
• Mutual funds: With one fund, you can invest in many individual stocks and/or bonds, managed by professional portfolio managers to diversify your opportunity and potentially spread out the risk. Carefully consider the fund’s investment objectives, risk, charges and expenses before investing.
• Stocks: If you’re interested in long-term growth, consider this: Common stocks have historically produced reliable growth. But past performance is no guarantee of future results.
• Bonds: Also known as fixed-income investments, bonds offer the potential for regular income and provide relative stability in your portfolio.

Investment Strategies

• Seek expert help: PINK has heard it time and time again – from the top execs and entrepreneurs who fill our pages to those who speak at our conferences: If you aren’t a financial expert, consider hiring one.  A financial adviser or money manager can suggest an investment program tailor-made for you.
• Consider a long-term approach. Frequently buying and selling investments introduces the uncertainty of market timing, which may dramatically increase the risk of investing. 
• Diversify. Owning different types of investments may offer more potential growth opportunities, while spreading out the risk. The best mix of investments depends on your risk tolerance, time frame for investing and current financial position.