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Retirement Planning for 20-Somethings:

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Don't Fall Into the 'Playing It Safe' Trap

By JEFF D. OPDYKE

November 15, 2006; Page D1

If you're in your 20s, you could be missing out on what may be your best chance to kick-start your nest egg.

With so many 20-somethings burdened by college debt, buying houses, starting families and generous spending habits, it's something of a marvel that they are contributing to their 401(k) accounts at all -- but, by and large, they are.

The problem is, many of them don't put much thought into where they're investing their money. You're not going to build much of a nest egg with your money stuffed into low-yielding bond and money-market mutual funds, which is where too much of it sits.

A recent Fidelity Investments study of nine million 401(k) participants found that 16% of workers in their 20s have no money in stocks. Separately, many have all of their money in just one investment, and of those nearly 40% have all their assets in conservative investments, such as "stable-value" funds, which are little more than glorified money-market funds, or fixed-income funds.

401(K) BASICS

• Max out: Contribute enough to capture your employer's maximum matching contribution.

• Allocate: People in their 20s should generally have at least 70% of their account in stocks. You have a long time to save; don't fret about market volatility.

• Don't default: Avoid your plan's default option if it's a money-market or stable-value fund. The low returns won't serve you well over time.

The youngest generation of workers has the most to gain and the most to lose when it comes to retirement savings. They have the longest period of time to benefit from compounded returns. Yet they're also the group most likely to suffer if Social Security is ever scaled back. And the chances of living off of a meaningful corporate pension 40 years from now are dim, to say the least.

That's why it's urgent to take control of your 401(k) account and allocate your money to engineer the kinds of returns you're going to need to fund your retirement.

One easy way to build a properly diversified portfolio: Invest in a target, or life-cycle, fund. Four out of five 401(k) plans now offer these one-stop-shopping options. All you do is pick a date in the future, near to when you're likely to retire -- say, 2050 for a current 25-year-old -- and have your 401(k) contributions flow into the fund built for that time period.

Because these funds are dynamic, changing their asset composition as you age, you won't have to make any other asset-allocation decisions. They invest aggressively in stocks in the early years when you're young and can accept the risk of volatile stock prices, then grow increasingly conservative, moving into bonds and cash as the decades pass and your retirement age approaches.

For instance, Vanguard's Target Retirement 2050 Fund is invested nearly 90% in stocks -- and its Retirement 2005 Fund, for workers retiring before 2008, is less than 50% stocks.

If your 401(k) doesn't offer a targeted fund, or if you just want to do the work yourself, allocating money isn't quantum physics.

One common industry benchmark is to subtract your age from 100, with that amount going into stocks. It's simplistic, but it gets you closer to where you need to be. So, for instance, if you're 25, you'd want about 75% of your 401(k) contributions going into stock funds.

Risk tolerance will play a role, "but don't be too focused on it," says Fidelity Senior Vice President Jamie Cornell. Remember: Over long stretches, the stock market rises despite short-term periods of upheaval. And since you won't touch your 401(k) money for 50 or even 60 years, you can tolerate the inevitable volatility. You might lower your stock exposure to, say, 70% if you're conservative, or raise to 90% or more if the volatility won't faze you.

Most companies providing 401(k) plans offer free online planning advice to help clients with asset allocation. T. Rowe Price clients, for instance, can access Morningstar Retirement Manager, which allocates assets based on the funds within a particular plan.

Principal Financial Group offers its 2.4 million 401(k) plan participants a nine-question online quiz that ultimately leads