Investing Tips for College Students and Baby Boomers (Plus Everyone in Between)
Laura answers common investing questions from a young college student and a Baby Boomer. No matter if you’re just starting out, getting close to retirement, or are somewhere in between, you’ll get tips to make sure you have plenty of money for a comfortable retirement.
Laura Adams, MBA
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Investing Tips for College Students and Baby Boomers (Plus Everyone in Between)
Investing for retirement should be a top priority in your financial life. However, the remaining time you have before you need to spend your nest egg must be a major factor in your investing strategy.
I’m going to answer common investing questions from a young college student and a Baby Boomer. I’ll cover eight investing tips to help you get on the right track (no matter your age) so you have plenty of money for a comfortable retirement.
Free Resource: Laura’s Recommended Tools—use them to earn more, save more, and accomplish more with your money!
Investing Tips for College Students
Adam M. says, “I’m an 18-year-old college student who also works up to 60 hours a week on the night shift at a shipping company. I would love to retire early and not have to work until I’m 70, like my parents. But I have little knowledge about setting up a retirement account, where should I start?”
I can tell that Adam is going to have a successful financial life because he’s disciplined, getting great work experience, and thinking about the future at such a young age. He has an extremely long time horizon, even if he decides to retire in his 50s or 60s.
Here are four investing tips for college students:
Tip #1: Read Investing Books
Most students graduate from high school or college without ever taking a personal finance class. Take your investing education into your own hands by reading good books. They’re inexpensive, or even free at the library, and can provide information that’s priceless!
My book, Money Girl’s Smart Moves to Grow Rich, tells you everything you need to know about the basics of investing, retirement accounts, and much more. Here are a few more great books that I recommend:
- The Truth About Retirement Plans and IRAs by Ric Edelman
- The New Savage Number by Terry Savage
- Making the Most of Your Money Now by Jane Bryant Quinn
Tip #2: Don’t Waste Time
Typical college students are thinking about joining a sorority and the next keg party, not about retirement, like Adam is. Here’s the upside to investing as soon as possible:
Let’s say you invest $5,000 a year, or about $100 a week, starting in college and continue for 40 years with an average 8% annual return. You’d accumulate about $1.5 million—not too shabby.
Having time allows you to harness the amazing power of compounding interest. Compounding means that the interest you earn gets added back to your principal. So you earn interest on your interest and the balance grows at an increasing rate.
But if you procrastinate and let time slip away, you lose it’s earning potential. Waiting until age 45 to get started means that you’d need to save more than $31,000 a year for 20 years to end up with that same $1.5 million.
You’d pay a total of $620,000 ($31,000 x 20 years) out of your pocket over 20 years compared to paying a total of just $200,000 ($5,000 x 40 years) when you start early and invest over 40 years.
Remember that investing early is like getting a healthy retirement nest egg on sale! It’s one of the best financial habits you can develop. Even putting aside small amounts on a regular basis can go a long way toward reaching goals like retirement, saving for a house, or paying for college.
Remember that investing early is like getting a healthy retirement nest egg on sale!
Also see: How to Get a Student Loan to Pay for College
Tip #3: Buy Funds—Not Individual Stocks
Sometimes young people receive well-meaning but bad investing advice from friends, family, or teachers. If anyone recommends that you buy this or that individual stock, smile politely and say, “thanks for your suggestion,” and never act on the information.
Many people believe that you should buy stock in companies that you like. Or they pass along an insider “tip” from the friend of a friend who works for a company that says the share price is about to skyrocket. Believe me, rumors you hear on the down low rarely pay off.
For the vast majority of investors, who don’t want to make a career out of stock picking, buying individual stocks is a bad idea. It’s risky because stock prices can be volatile and fluctuate wildly. Trying to find one or two winning stocks is gambling, not smart, strategic investing.
Don’t get me wrong—young investors should be primarily investing in stocks because they can afford to go for aggressive growth. However, the stocks should be held in funds that own many securities at once, such as mutual funds, index funds, or exchange-traded funds.
Owning a diversified fund gives you much more safety and control. If the price of one stock in a fund takes a dive, it’s no big deal because you own hundreds or thousands of other stocks that may be holding steady or going up.
See also: How to Make Money Investing in Stocks
Tip #4: Invest in a Roth IRA
Another huge benefit of a Roth IRA is that you can tap it before retirement with no penalty.
If you’re a working student and your employer offers a 401k retirement plan, that’s the first place to begin investing. You can choose from a menu of diversified funds. However, if you’re under age 21, you may not be eligible to participate in some workplace plans.
The good news is that there’s no age restriction for IRAs. The only requirement is that you have some amount of earned income. Unlike a traditional IRA or 401k, you pay tax upfront on funds you contribute to a Roth IRA and then take tax-free withdrawals during retirement.
Another huge benefit of a Roth IRA is that you can tap your contributions before retirement with no penalty, as long as you’ve owned the account for 5 years. For 2015 and 2016 you can contribute up to $5,500 to a Roth IRA.
If you’re ready to open a traditional or Roth IRA, checkout the following brokerage sites that offer great features like phone support, smartphone apps, and automatic transfers:
Free Resource: Retirement Account Comparison Chart (PDF)—a handy one-page download that explains the differences between the main types of retirement accounts.
Investing Tips for Baby Boomers
Now let’s shift gears and cover what to do if you’re a Baby Boomer who hasn’t saved enough or is getting a late start. By the way, Boomer is a nickname for people born during the post-World War II baby boom, which was from about 1946 to 1964. In 2015, Boomers range in age from 51 to 69.
Una W. says, “I’m a 54-year-old woman who is just waking up and starting to take control of my personal finances and investing. My husband and I are ex-pats living in Seoul, Korea. He’s retired and I earn $2,500 per month as a teacher. I have no debt, $8,000 in a low-interest bank account, and $70,000 in U.S. stocks. What tips do you have to make as much as possible within the next 20 years through investments?”
When retirees are asked what they would have done differently in their financial lives, the number one answer is always save more money. I’m glad that Una has “woken up” financially and is ready to make the most of her investments.
Here are four investing tips for Baby Boomers:
Tip #1 Focus on What You Can Control
If you’re in your 50s or 60s and haven’t saved a big nest egg, don’t beat yourself up about it. Just start focusing today on key factors that you can control, which are your expenses and income.
Figure out how to ruthlessly cut your spending so you can come up with more money to invest. Squeeze your budget as tight as possible until it hurts and then squeeze a little tighter. Cancel services you can live without, downsize your housing, or sell a vehicle so you can invest as much as possible.
Another option is to increase your income with a second job or side-hustle in the home stretch to retirement. After all, these are likely peak earning years of your career, which is a terrific opportunity to make up for low savings.
See also: How to Save for Retirement on Less Income
Tip #2: Make “Catch Up” Contributions to Retirement Accounts
Uncle Sam also gives you a break by allowing additional “catch-up” contributions to retirement accounts when you’re age 50 or older at the end of the calendar year.
Uncle Sam also gives you a break by allowing additional “catch-up” contributions to retirement accounts when you’re age 50 or older. If you’re working and have a 401k or 403b, you can contribute up to $24,000 in 2015 and 2016.
If you’re not working, find a part-time job, do seasonal work, or consider becoming a freelancer and save every dime in an IRA. The catch-up provision allows you to contribute an additional $1,000 for a total of $6,500 to a traditional or Roth IRA.
If you’re married and your spouse doesn’t work, you can contribute the same amounts in a spousal IRA in his or her name. That gives you as much as $13,000 in IRA savings as a couple.
If you’re self-employed, you have even more tax-advantaged savings options. You might start a SEP-IRA (Simplified Employee Pension) with a maximum contribution of up to $53,000 in 2015 and 2016, no matter your age.
Since Una is overseas, she may not be eligible for an IRA due to the foreign earned income exclusion. As I previously mentioned, you must have earned income to make IRA contributions. Most Americans living abroad use the exclusion to avoid paying tax to both the U.S. government and their home country.
If you’re not eligible for a retirement account or have maxed one out but still have more money to invest, use a regular, taxable brokerage account.
See also: 5 Retirement Options When You’re Self-Employed
Tip #3: Prioritize Your Financial Needs First
Many Boomers have become empty nesters only to find that their adult chicks fly back. Millions of so-called boomerang kids are returning for shelter due to low starting salaries, student loan debt, and mounting credit card balances.
While it’s human nature to want to provide for your children, too many aging parents are doing it to the detriment of their own financial security. Unless you expect your children to pay for your retirement, don’t allow their expenses to take priority over your investing goals.
Unless you expect your children to pay for your retirement, don’t allow their expenses to take priority over your investing goals.
Tip #4: Scrutinize Your Investment Portfolio
As you get closer to retirement, the allocation of your investments among different classes—such as stocks, bonds, real estate, precious metals, and cash—is especially important. You have more money at stake and less time to recover from a market downturn.
If you’re aggressive and own too many stocks, your portfolio value could drop right before you’re ready to take the plunge into retirement. On the other hand, investing too conservatively could mean that your nest egg won’t grow enough to last as long as you need it.
Determining what mix of assets to own depends on your time horizon for retirement and your ability to tolerate risk. As I previously mentioned, younger investors should own mostly stocks—perhaps as much as 90%.
Older investors still need stocks for growth, but not as much. For instance, if you’re Una’s age (54), you may want to own at least 50% of the value of your portfolio in stocks and the rest in bonds and cash. So, I recommend that she sell a portion or all of her individual stocks and invest the money instead in one or more diversified funds.
The key to making up for lost time is to live below your financial means, maintain or increase your income, and use tax-advantaged retirement accounts so you can invest as much as possible.
See also: How to Invest Money in Your IRA or 401k Retirement Account
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Retired Man Holding Piggy Bank image courtesy of Shutterstock
About the Author
Laura Adams received an MBA from the University of Florida. She’s an award-winning personal finance author, speaker, and consumer advocate who is a frequent, trusted source for the national media. Money-Smart Solopreneur: A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlers is her newest title. Laura’s previous book, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love, was an Amazon #1 New Release. Do you have a money question? Call the Money Girl listener line at 302-364-0308. Your question could be featured on the show.