If you are in your early 20s and able to save for retirement, then you are well on your way to building a nest egg that may allow you to retire early and comfortably. However, it is important for younger savers to elect appropriate investments for themselves given their age, income and willingness to undertake market risk. Let's take a look at some of the investment selections that are likely to make the most sense for younger savers.

Risk and Reward
Once you have joined the workforce and you have successfully saved the recommended emergency cash fund, you can start to focus on funding your retirement account. As a 20-something, you enjoy the luxury of working for another 40 years or so, which means that your savings have much longer to grow versus somebody in their 30s or 40s. Due to this longer amount of time, you are able to take on a bit more risk while you are in your 20s. Alongside greater risk comes the potential for greater reward in the form of higher returns. Therefore, the amount of money that you allocate to riskier assets such as equities should be highest when you are younger.

Allocating to Equities
To determine how much of your retirement savings should be invested in equities, many people simply subtract their age from 100. If you are 20, then 100 minus 20 equals 80. So, at least 80% of your retirement savings should be allocated towards equities. Funds that are not allocated to equities should go into investment grade corporate bonds or cash.

Which Equities Should I Choose?
The equities selected for a retirement account depend largely upon the type of account in which retirement assets are being housed. In many people's cases, retirement assets are held in an employer's 401(k) or 403(b) plan. These plans are limited to a few handfuls of investment options that typically include mutual funds. A mutual fund may contain a blend of stocks, bonds and cash. Many retirement plan options also include equity-only mutual funds, bond-only mutual funds and targeted retirement date funds. Therefore, it is important to understand what the components are of each fund. This information can be found on a fund's fact sheet or within its prospectus.

Targeted date retirement funds are an interesting option for 20-somethings because they take much of the work out of the mutual fund selection process. Essentially, the allocation of the fund is adjusted as you get older, which means the mutual fund would be heavily weighted towards equities while you are in your 20s but heavily weighted towards cash and bonds while you are in your 70s. Many targeted date funds are named with the intended retirement date. For example, the Vanguard Target Retirement 2050 Fund would be suitable for somebody who plans on retiring in 2050.

When it comes to making investment selections for an IRA, you may enjoy a bit more flexibility. Within most IRAs, you are able to invest in most mutual funds. You may also be able to invest in individual stocks and bonds that may not be available in 401(k) and 403(b) plans. If you decide to build up your equity exposure on your own, keep in mind that not every piece of equity is created equal. Foreign equities and small- or mid-cap equities tend to be much more volatile than large-cap U.S. equities. Other asset classes such as commodities or real estate can add meaningful risk to your retirement portfolio.

The Bottom Line
As a 20-something, you are able to take on more risk than a 40-something. Most people take on risk by investing in equities. How you obtain this equity exposure depends upon the type of account being used for retirement savings. An employer's 401(k) or 403(b) plan offers several suitable investment options, while an IRA may offer even more flexibility. Prior to making any selections, be sure to read up on your investment options so that you can be well-informed regarding your investment. If you have a financial advisor, be sure to consult with him or her.

Related Articles
  1. Professionals

    How to Protect Elderly Clients from Predators

    Advisors dealing with older clients face a specific set of difficulties. Here's how to help protect them.
  2. Professionals

    Social Security 'Start, Stop, Start' Explained

    The start, stop, start Social Security strategy is complicated. Here's what retirees considering it need to consider.
  3. Retirement

    Strategies for a Worry-Free Retirement

    Worried about retirement? Here are several strategies to greatly reduce the chance your nest egg will end up depleted.
  4. Professionals

    Your 401(k): How to Handle Market Volatility

    An in-depth look at how manage to 401(k) assets during times of market volatility.
  5. Professionals

    How to Build a Financial Plan for Gen X, Y Clients

    Retirement is creeping closer for clients in their 30s and 40s. It's a great segment for financial advisors to tap to build long-term client relationships.
  6. Professionals

    Don't Let Your Portfolio Be Trump'd by Illiquidity

    A look at Donald Trump's statement of finances and the biggest lesson every investor can learn.
  7. Professionals

    What to do During a Market Correction

    The market has corrected...now what? Here's what you should consider rather than panicking.
  8. Retirement

    Maxing Out Your 401(k) Is Profitable: Here's Why

    It's shocking, but most American workers (73%) have no 401(k) retirement funds. Start saving now to anchor your retirement.
  9. Professionals

    Top Questions to Ask When Choosing a Robo-Advisor

    Think a robo-advisor might be the right choice for you? Be sure to ask these questions first.
  10. Professionals

    Top Retirement Hack? Start with a Lifestyle Change

    Instead of going through the usual retirement planning steps, some people are focusing on fostering a lower cost lifestyle from the start.
  1. Qualified Longevity Annuity Contract

    A Qualified Longevity Annuity Contract (QLAC) is a deferred annuity ...
  2. Backdoor Roth IRA

    A method that taxpayers can use to place retirement savings in ...
  3. Linked Transfer Account

    Accounts held by an individual at a financial institution that ...
  4. Current Service Benefit

    The amount of pension benefit accrued by an employee who had ...
  5. Self Invested Personal Pension ...

    A tax-efficient retirement savings account available in Great ...
  6. Senior Move Manager

    Senior move managers (SMMs) help seniors downsize and relocate ...
  1. What are the best ways to sell an annuity?

    The best ways to sell an annuity are to locate buyers from insurance agents or companies that specialize in connecting buyers ... Read Full Answer >>
  2. Can my IRA be used for college tuition?

    You can use your IRA to pay for college tuition even before you reach retirement age. In fact, your retirement savings can ... Read Full Answer >>
  3. Why are IRA, Roth IRAs and 401(k) contributions limited?

    Contributions to IRA, Roth IRA, 401(k) and other retirement savings plans are limited by the IRS to prevent the very wealthy ... Read Full Answer >>
  4. How do you calculate penalties on an IRA or Roth IRA early withdrawal?

    With a few exceptions, early withdrawals from traditional or Roth IRAs generally incur a tax penalty equal to 10% of the ... Read Full Answer >>
  5. What are the best ways to use your 401(k) without a penalty?

    The best way to use your 401(k) retirement savings account is to take normal distributions after you reach retirement age. ... Read Full Answer >>
  6. Is my IRA protected in a bankruptcy?

    All types of individual retirement accounts, or IRAs, recognized under the federal tax code enjoy substantial protection ... Read Full Answer >>

You May Also Like

Trading Center

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!