Young investors

If retirement is still many years away

The rest of the world might be reeling from its losses, but if you're younger than 30 or so, this financial collapse could end up being a very lucky thing for you. Sure, it might be more difficult for you to find a new job or a mortgage right now. But everything you invest in is likely to be much, much cheaper than it would have been if the money world hadn't fallen apart.

Even if you have been diligently investing for the past decade and your account balances are half of what they were, you should still be better off in the long run because of the price drop—as long as you keep investing now.

Although your generation is less likely than its predecessors to enjoy a traditional pension, 401(k) plans have their pluses. One is that your employer automatically takes out your monthly contributions and might also match them, up to a certain amount. For example, if you put in 3 percent of your salary, your employer might match it, dollar for dollar. If your company offers a match, take that free money while it lasts because it might soon go the way of the traditional pension. According to Hewitt Associates, a benefits consulting firm, over the past year almost 200 companies, including Coca-Cola and UPS, have changed or eliminated their matches because of the economy.

In addition to your 401(k) plan, you might have an IRA (Individual Retirement Account) or two, especially if you have changed jobs during your career. When you leave a job, you'll usually have several options for your 401(k). You can roll the money over to your new company's 401(k), if the employer permits it, or into an IRA that you control. Either way, you won't have to pay taxes until you start taking money out.

You can also open an IRA with other, non-401(k) money. You'll have two kinds to choose from: a traditional IRA, in which your initial contribution is tax-deductible but your eventual withdrawals are taxed, or a Roth IRA, which works just the opposite way. You can also use an online calculator, such as Bloomberg's (at www.bloomberg.com/invest/calculators/roth_tra.html), to see which makes the most sense for you.

With an IRA you have to make your own decisions about what to invest in. After that it's easy. Many mutual-fund companies will be more than happy to move money from your bank account to your IRA each month through an automatic-investment plan. They might even waive their minimum account balances if you agree to automatic investments when you sign up.

How much should you put in? As much as you can. You can start with, say, $100 per month and build up. You can contribute up to $5,000 per year to a traditional IRA, or potentially more if you have a SEP-IRA, a retirement account for the self-employed.

The biggest hurdle for many young investors is simply finding the money to fund their retirement accounts. In 2007 only 42 percent of households younger than 35 had started saving for retirement, and the median value of their accounts was just $10,000. Most 35- to 44-year-olds had started saving for retirement—58 percent—and their accounts were worth about $36,000.

Zac Bissonnette, the finance writer, is part of a growing chorus of experts who blame student loans for the lack of retirement savings. The average college student graduates with $22,700 in student debt, he says, making graduates essentially indentured servants. They have to work off debt for decades during the very period—the early decades of a worker's life—that can be so crucial to retirement saving.

Generally, the younger you are, the more money you should have in stocks. What percentage is a matter of opinion. It has long been said that whatever your age is, that should be the percent of your retirement savings in bonds, with the remainder going into stocks. But as life spans increase, that recommendation is losing its validity. Instead, the solution for most investors is as simple as life-cycle or target-date retirement mutual funds. In fact, as a result of the Pension Protection Act of 2006, many employers automatically put their workers' money in such funds by default (if the employees didn't make another choice themselves).