Since time is on their side, young professionals can afford to be more aggressive, with a heavy weighting of equities in their portfolio. Although some may have a low tolerance for risk, they should realize that equities have produced an average annual return of 11.83% over a 30-year period, according to a recent University of Michigan study. Investing early for retirement allows money to grow tax free and over the long term can add up to large returns. First, newly minted professionals should take advantage of tax-deferred income by investing in employer-sponsored 401(k) and 403(b) plans, which represent an easy access point for financing retirement. (For info on 2012 contribution limits, go to IRS.gov.)
Another vehicle to place young professionals on that path is an IRA. For instance, a 25-year-old who begins with a $2,000 contribution to an IRA and adds that same amount each year will end up with more than $330,000 by the time he or she is 65, assuming a 6% annual return.
The youngest clients of Edward D. Williams, founder of Fairfax, Virginia’s DEW Financial Management Group L.P.L. (www.lpl.com/edward.d.williams), matured during a decade when children saw their baby boomer parents’ retirement plans evaporate because they were not prepared for the future beyond having faith in jobs and pensions.
Now at age 26, those same clients, who are married, employed by federal contractors, and earn combined salaries of more than $100,000 annually, are aggressively building strong retirement portfolios by investing in ETFs such as iShares. The iShares’ High Dividend Equity Fund (HDV), since its inception in 2011, has had a 12.12% total return benchmarked against the 12.56% recorded by the Morningstar Dividend Yield Focus Index.
Williams says, “Investors in their 20s should be aggressive and proactive.” So he also suggests they consider investing in individual stocks, such as AT&T Inc. (T), Merck & Co. (MRK), Intel Corp. (INTC), and ConocoPhillips Co. (COP).
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