Attention Generation Xers: Invest Now to Retire Rich
OK, twenty-somethings. While Marc Andreessen, your peer and founder of Netscape, may be sitting on a pile of dough and seems set for life, many of you don't have a nickel saved.
As you make yet another cafe latte at Starbucks or the equivalent, your future definitely isn't so bright that you need shades. But fear not; if you start to invest now, you will be a whole lot better off in forty years than those overweight baby boomers who are blocking your career prospects.
The great thing about investing is that it rewards long-term behavior. Even if you make mistakes or invest in low-yielding securities, you're almost always going to do better than someone who invests later in life and enjoys a higher rate of return due to the "magic" of compounding.
For example, if you're 25 and invest $4,000 a year from now until you're 65, you'll retire with about $1 million in cold cash, assuming that you'll earn 8 percent a year. If you wait until you're 45, you'd have to put away nearly $22,000 a year to achieve the same return.
Actually, you can do even better if you take advantage of retirement accounts, which shield your investment gains from Uncle Sam. Contribute as much as you can to your IRA or 401(k) plan at work. Many companies will match your contributions up to a certain level and that money will not be subject to income tax until you retire.
Investing in your twenties also increases the chances that you'll be able to retire at an early age. Even if you don't, it will give you the freedom to call it quits with your employer and find another position somewhere else.
At 25 you can afford to invest in riskier investments, such as growth stocks, which might be volatile and fall in the short term but may have a big, long-term payoff. You'll have enough capital built up that you won't have to sell in a bear market and even if you do, you'll still have plenty left over.
Finally if you have built up a nest egg at an early age, you can cut back on your disability or life insurance, two commonly used methods to reduce risk in your working years or when you have a young family. Instead, you can fall back on your investment gains.
Bottom line: you should invest even if you're making chump change. Most mutual funds allow you to open an IRA account with $500. To beat a cliche of your generation to death: just do it.
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