401(k) Strategy for Your 20s: Take Advantage of Time

Alex Abels, 23, landed her job at Bovitz, a marketing research firm in Encino, Cal., right out of college and enrolled in the company 401(k) a year later, when she became eligible. On joining the plan, she was asked to choose among five lifestyle portfolios, ranging from very conservative to very aggressive. "I'm kind of a weenie," says Abels. "I want to be safer, but my co-workers said no, you're so young, it's okay to take risks." She ended up going with the second-most-aggressive fund in the lineup, a growth portfolio heavily invested in stocks.

At first, Abels deferred 6% of her pay to the 401(k), exceeding the company match by three percentage points, but she later switched to a dollar amount equal to 6% of her base salary. "I work a lot of overtime, so I wanted to take that 6% out of my base salary as opposed to base plus overtime," says Abels. She recently allowed the company to bump up her contributions slightly. "It's something the company will do automatically once a year unless you opt out."

The advice: Alex's fund is appropriately stock-heavy for her age, as long as she is prepared for the inevitable market fluctuations, says Gil Armour, a certified financial planner in San Diego. At her age, she should welcome the dips and view them as buying opportunities. But Armour recommends that she go back to a percentage deferral to capture a bigger portion of her income and that she aim to contribute 10% to 15% of her salary, including the company match.

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