It is never too early to begin saving for retirement. Although young people are the least likely to make preparations for their retirement years, people in their 20s have advantages when it comes to putting away money for retirement. Young people have a larger number of working years ahead of them to earn money, save and take investment risks. Understanding the best retirement plans for young people can assist you in your retirement investment plan decisions.
High-Risk Mutual Funds
Young investors generally are encouraged to take on more risk than older investors, because they have more working years ahead to recoup earning if investments or the market suffer a downturn.
Young people who are not interested in taking the time to master investment techniques can place their money in the hands of a mutual fund managers to take advantage of the profit potential of the stock market while gradually growing their invested capital over the years. Investing in more aggressive mutual funds, weighted heavily with growth stocks and stocks of newer companies, can yield higher returns than favoring bond funds or funds with more conservative profiles that offer less risk.
A 401k plan may be offered to a full-time employee by a wide range of corporate and private employers. These specialized retirement plans often allow employers to make contributions to employees' accounts, and they are portable when switching to another employer. Opening a 401k through your first employer and maintaining the account throughout your working years can provide a significant source of income when you retire. Again, the power of compounding capital gains is amplified by young people's longer investment time horizon. Contributions to a 401k are tax-deductible, and withdrawals made in retirement are taxed as ordinary income.
Term Life Insurance
Life insurance is fundamentally designed to provide financial protection for surviving family members when the policyholder dies. Life insurance can be used as a profitable retirement investment as well, however, because policyholders have the option to withdraw payout funds themselves.
Term life insurance policies require policyholders to make payments for a certain number of years, after which the policy pays out a specified amount. Young people can fund term life insurance policies for 10, 20 or 30 years, then cash out the policy when they reach retirement age in their 50s or 60s. While cashing out insurance policies can incur penalties that reduce the total payout, the payout still may be significantly larger than the total amount of premium payments.
Real Estate Investment
Real estate portfolios can build value slowly over time, developing into highly profitable continuing investments after 20 to 40 years of wise investment. A young person who uses cash gifts from graduation, military signing bonuses or other lump-sum cash receipts to purchase real estate can become profitable lessors early in adult life. After paying off multiple mortgages with rent income over a period of 20 to 40 years, young people can find themselves with a reliable stream of rental-property income for retirement.