YOU ARE SAVING diligently for retirement—but where should you invest those savings? You’ll want to give careful thought to your so-called asset allocation, which is your basic mix of stocks, bonds and other investments. You will also want to consider whether to stash your savings in a taxable account, your employer’s 401(k), a Roth IRA or elsewhere. You can get detailed help with these two issues in the chapters devoted to investing and taxes.
You might start by thinking about your human capital. When you have a paycheck to cover your daily living expenses, there’s less need to buy conservative, income-generating investments. That frees you up to invest for the long haul by buying stocks, which can offer wretched short-term performance but healthy long-run gains. Because you won’t need to spend all your savings on the day you quit the workforce, your investment time horizon if you’re in your 20s might be six decades or more, which should be plenty of time to ride out a few rough spells in the stock market.
Your long time horizon also means you can make full use of retirement accounts. These involve a long-term commitment: There are typically tax penalties if you withdraw money before age 59½. But in return for that commitment, you can enjoy some great tax advantages, as well as a potential matching contribution if you fund your employer’s retirement plan.
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