Tips for young investors: Save a little now, have more later

The idea of saving for retirement always terrified Zack Teibloom. With the stock market's big drop this year, it seems even more daunting.

“I don't even have one K, let alone 401 Ks,” says Teibloom, 23, a recent college grad who works as an editor for a small magazine in Chicago. “I'm worried that if I put money away, it won't even be safe the way the markets are going.”

The saving and investing habits of young workers have long been dismal. Only 49 percent of eligible workers in their 20s participate in 401(k) plans offered through their employers, according to a 2007 study from Hewitt Associates Inc., a Lincolnshire, Ill., consulting firm. And less than 20percent of this group is saving anything at all for retirement.

Declining stock prices actually favor young investors, because it means the shares they buy have more room to grow in the decades before they hit retirement. But anecdotal evidence suggests the rocky stock market is scaring off many young people.

Recent changes may make it easier for some younger employees to begin building a nest egg. Two years ago, Congress altered the law to make it easier for employers to automatically enroll workers in retirement-savings plans. Employers can deduct money from workers' paychecks and invest it in a number of conservative investments, such as so-called balanced mutual funds, which hold both stocks and bonds.

Employers often set the contribution rate at 3 percent of workers' salaries, and some auto-enroll workers at a higher rate to ensure they get the full company match – the amount an employer contributes into an employee's account beyond salary. Some employers also automatically increase workers' contributions each year.

Employees have the option of opting out of automatic retirement-savings plans, but few do. Often, the time frame for dropping out of automatic enrollment is as little as 10 days.

The law is having an impact.

Fidelity Investments, which runs retirement plans for 16,700 companies, says that as of June, 2,343 plans had automatic enrollment, up from 723 plans the year before.

Other financial-services firms are targeting younger people in their marketing. Charles Schwab Corp., for example, has been running ads for various products – such as its High-Yield Investor Checking Account, which is linked to a brokerage account – in TV shows such as “30 Rock” and “Heroes,” which appeal to a younger audience. Schwab says it has seen an increase in younger clients, but declined to release specific numbers.

As experts are quick to point out, young workers don't necessarily have to save a lot to have a big effect on their future retirement savings. Over time, the power of compounding will amplify the growth of money saved in your 20s. For example, if you invest a modest $100 a month for 40 years in an investment account earning 7percent annually, you will end up with $262,000.

The message has gotten through to some young people. Sekhar Suryanarayanan, 25, a business analyst at Deloitte & Touche LLP in San Francisco, contributes 10 percent of his salary and gets a 6 percent match from his employer.

“I feel a sense of urgency and nervousness about retirement,” Suryanarayanan says. “But saving was something that was pounded into me by my parents.”

Still, 40 percent of workers in their 20s withdraw their 401(k)s in cash when they switch jobs, rather than roll it over into a new retirement account or leave it in the old account, according to a recent Fidelity study. And they'll switch jobs between seven and 11 times in their careers, says Scott David, president of workplace investing at Fidelity.

Kevin Cronin, 27, a public-relations associate in New York, isn't eligible to join his company's 401(k) plan until next summer, but he continues to contribute to a Roth individual retirement account, which he started in 2003 when he left college. He maxes out his contributions and is undeterred by swings in the stock market.

“It's a long time horizon,” he says. “I'm just going to screw it up if I try to micromanage it.”

Many young investors aren't aware that even if they're not eligible for a 401(k) through work, they can still start investing on their own through an IRA, as Cronin has done. Accounts can be opened with as little as $50.

“There's a misconception that you need a large amount of money to get started,” says Ilkay Can, director of acquisitions at Schwab. “But you don't.”