Retirement Investing in Your 20s

As life expectancy continues to increase, planning early can ensure a comfortable retirement; more time for your investment to grow through compound interest

Morningstar News Team 1 September, 2016 | 8:00AM
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Is it too early to start planning for retirement in your 20s? The answer is no. As life expectancy continues to increase, planning early can ensure a comfortable retirement. While planning for retirement at this age may be the last thing on your mind, the earlier you start the better chance you have of achieving your retirement goal. An early start also allows more time for your investment to grow through compound interest. In addition to starting early, here are some steps you should consider when planning for retirement in your 20s and early 30s.  

Maximise Your Workplace Pension

Young investors should maximise contributions to their workplace retirement scheme. A Government initiative called auto-enrolment has ruled that all businesses regardless of their size must offer a pension plan by 2018, and automatically enrol their employees.

Your employer will match your contributions in a workplace pension up to a pre-agreed cap, and the Government will top it up with income tax relief – more than doubling your savings every month.

Failure to take advantage of this benefit means missing out on free money.

Consider a SIPP

Much like a workplace retirement plan, self-invested personal pensions contributions are not taxed.

SIPPs can be managed by the individual, on online investment platforms. You make contributions from your post-tax wages but the government then tops up your contributions with the income tax you have already paid. These savings are also accessible when you reach 55, but only the first 25% is tax-free after which withdrawals as a lump sum or income are liable to income tax.

Manage Your Risk

One mistake young investors make is selecting a less than optimal stock/bond allocation based on their age. Typically, investors in the 20s or 30s are best advised to select a stock-heavy portfolio with a minimal allocation to bonds. For investors who feel less comfortable with selecting their own investments, mixed-asset funds can serve as a convenient alternative.

If you are in your 20s or 30s, it might make sense to choose an aggressive portfolio allocation and limit your investment in bonds. This strategy is higher risk, and prone to periods of volatility, but with a long-term investment horizon these risks could pay off and lead to greater returns.

Avoid Market Timing

A look back in time suggests that some of the biggest gains in the stock market have followed periods of poor market returns. Investors can make the mistake of timing the market by pulling out of their investments during market losses and buying back when the market has rebounded. Investors who attempt to time the market run the risk of missing periods of exceptional returns.

With time on your side, it is best to adopt a long-term approach to investing. Keep in mind that you should first determine how much money you may need in retirement as well as determine your annual expenses before considering the options outlined above. It is always a good practice to track your spending to help maximise your savings and investments.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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