I thought i will put this up as well. Its a good article that its not all about saving and not having fun. its finding the right balance in life.
A reader writes:
As a “younger investor” myself looking for ways to
retire with millions (we can all dream), I’ve been trying to start
early and doing my research to figure out ways to gain an advantage in
the long run. Starting young is always helpful. But the idea of timing
the market makes me nervous. At the same time, with the market in the
dumps – isn’t this the best time, as a 20-something, to jump in and
fill my retirement portfolio exclusively with stocks? Maybe if I close
my eyes and look away for a year, when I look back there will be a nice
She wrote this in response to my blog entry in June about research saying that if you’re young and investing for retirement, it’s a good idea to take a lot of risk — perhaps even more
risk than putting everything in stocks. But do read the comments on
that blog entry: they’re all very smart, and there are indeed good
reasons not to borrow the money you’re saving for retirement.
What that means is that the first thing you do, if you’re in your
20s, is pay off your credit cards and all your other debt, with the
possible exception of any low-interest-rate student loans you might
have. Only once you’ve done that should you even think about saving for retirement.
But the second thing you should do, frankly, is think seriously
about spending your income rather than saving it. People in their 20s
get more value out of every marginal dollar than they will in their
30s, 40s, or 50s. Steve Levitt puts it really well:
The right reason to save is so you can even out your
consumption. When times are good, you should save, and when times are
Most likely, I would never be as poor again as I was starting out. That meant I should have been borrowing, not saving.
There’s a reason why it’s commonplace for parents to give or loan
money to their children, while flows in the other direction are rare
indeed: older people, as a rule, have more money — which means that
one dollar is worth less to them than it is to their kids. When you’re
in your 20s, a couple of hundred dollars can significantly change your
standard of living; when you’re in your 40s, it probably won’t. (And if
you do find yourself, in your 40s, at a point in your life
where a couple of hundred dollars will significantly change your
standard of living, I can assure you that having saved more in your 20s
wouldn’t have changed anything.)
If it hurts to save, then, don’t. You’re only young once: enjoy it.
No matter what the financial-services industry would have you believe,
now’s not the time to worry about your income when you’re 80.
Okay, now we’ve got that out of the way, let’s say you’re in your
20s and you do have some excess cash you want to use for retirement —
maybe you’re in the fortunate position of having an employer who’ll
match your retirement savings, or something like that, in which case
it’s a much better idea to try and maximize those 401(k) contributions.
In that situation, then yes, putting your savings 100% into stocks
makes sense. The worst that can happen is that your retirement savings
go down — but since you weren’t going to touch this money until you
were in your 60s anyway, that makes zero difference to your present
standard of living. Meanwhile, if your investments go up, as stocks
usually do, then you’re precisely where you want to be: leveraging the
magic of compounding for decades.
The key insight here is that you’re making relatively small regular
contributions to your retirement account. As you earn more money in the
future, those contributions will increase in size. The contributions
you make at the beginning of your career are small enough that only a
long period of good returns will turn them into something you can live
off in retirement. If those small initial contributions are wiped out,
you haven’t lost that much, by the standards of your 70-year-old self:
remember, older people are richer. On the other hand, if they do well,
then you’ll feel great.
So yes, if you’re saving for retirement, put 100% of your
contributions into stocks. (If you want to start getting sophisticated,
then maybe buy ETFs of other asset classes like real estate and
commodities, but let’s keep things simple for the time being.) You’re
not timing the market, you’re just giving yourself the maximum amount
of time to see that investment blossom over the decades into something
But if you’re not saving for retirement, don’t let the
financial services industry guilt-trip you into thinking that you’re
doing something horribly wrong. Retiring with millions is all well and
good, but don’t let it prevent you from going out and having fun today.