5 Tips For Investing In Your 30s

Published: March 8, 2017, 7:51 p.m.

b'As many of my listeners know, I am a huge proponent of saving diligently and investing as early as your first paycheck to take advantage of the magic of compounding.
If you skipped saving and investing in your 20s, don\\u2019t worry. You\\u2019re definitely not too old to reap the benefits of investing. Getting started now gives you plenty of reasonable paths to building a multi-million dollar nest egg by retirement.
Especially now with the stock market hitting new highs, if you\\u2019re working and saving and have been afraid of the stock market, wake up! Put the past behind you and get invested. You have a long time to have these investments work out in your favor.
1. Start with your 401(k)
A 401(k) is the first place most people should save for retirement. It has a high annual contribution limit of $18,000. Contributions get swept into the account directly from your paycheck\\u2014before taxes\\u2014like magic. And, perhaps best of all, many employers will match your contributions, at least, up to a cap. That\\u2019s free money you won\\u2019t find through other offerings.
Here\\u2019s the payoff: Let\\u2019s pretend you make $50,000 and begin saving at age 30. Let\\u2019s also make a few reasonable assumptions. Let\\u2019s say you get 2% annual salary increases, save 10% each year towards your 401(k), collect a 3% match from your employer, and get a 6% average annual return on your investment.\\xa0 This alone will net you a little over $1 million by age 67. If you make more, save more and invest more\\u2014all the better.
2. Supplement with a Roth IRA
Once you\\u2019re capturing that full 401(k) match, you should take a second look at your 401(k)\\u2019s investment options and take particular note of the plan\\u2019s administrative fees. If your plan is too costly, you\\u2019re better off directing any additional contributions to the second-best place for your retirement savings: an individual retirement account, such as a Roth IRA.
As I noted above, with a 401(k), your contributions go in pretax, which means they\\u2019re taxed when you withdraw them in retirement. With a Roth IRA, your contributions go in after-tax, which means you invest, pay no tax when you make withdrawals in retirement\\u2014so your money grows tax-free in a Roth IRA\\u2014which is really nice.
This tax diversification is why it\\u2019s a good idea to combine a 401(k) with a Roth IRA if you meet the income eligibility rules for a Roth.
The downside is that IRA contributions have lower caps than 401(k)s, just $5,500 in 2017 versus $18,000 in your 401(k). So, if you max out your IRA contribution, go back to your 401(k) until you hit its $18,000 ceiling.
Consistently saving $5,500 in your Roth IRA each year beginning at age 30 with a 6% return will give you about $740,000 at age 67. But remember, we called this a supplement, and that\\u2019s $740,000 you can draw on tax-free in retirement, over and above your 401(k).
3.\\xa0Time is on your side
Young people have a long-time horizon before retirement, which means they can worry less about short-term stock market volatility and stay invested for the long run and get the higher long-term returns associated with stocks without worrying about bonds, etc. So, while in your 20s and 30s, focus your investments on stocks and stock mutual funds. But do not get greedy or cocky! Be prudent, don\\u2019t bet the bank on speculative stuff, diversify, ignore market volatility, do not rush in to buy or sell, but hold your investments over time. And for the stocks that pay dividends, I\\u2019d strongly suggest you enroll in automatic dividend reinvestment, where as soon as your dividends are paid out, they are used to buy additional fractional shares of the stocks you own\\u2026 this also works for ETF\\u2019s and Mutual Funds and is a great way of building your wealth.
Let\\u2019s say you played it safe in your 401(k) and earned an average annual return of 4% through some combination of bonds and other investments, instead of the 6% you could get with stocks.'