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Happy Friday everyone!
Yesterday, I received the following great question/message from a reader about the recent market downturn we have experienced:
Considering the current plight of the stock market, do you still recommend for 20-somethings to max-out contributions to their 401k retirement accounts? Or, should they invest in a high-interest cash savings account instead?
I am a 29-year-old with a lifecycle mutual fund with Fidelity and just lost $2,000 in the past two days and am wondering what to do. Thanks for your help!
Reader Financial Details:
- Already has adequate medical, dental, and vision insurance.
- Has 6-9 months worth of living expenses in a cash savings emergency fund.
- Employer does not match 401k contributions.
- Currently maxes out 401k with 100% of contributions going to the Fidelity 2050 Freedom Lifecycle Fund.
- Does not have an IRA.
- Is currently satisfied with the asset allocation offered by Fidelity through the 2050 Freedom Fund. Also prefers the “hands off” approach offered by lifecycle funds.
How would you advise this reader to proceed? Please share your insight by commenting below!
To summarize, below is how I think the reader should proceed:
1) Do not start contributing to a high yield cash savings account.
2) Open up a Roth IRA with Vanguard. Fully fund it before beginning to contribute to your 401k and invest in low cost index mutual funds or Vanguard Lifecycle Funds (similar to the ones offered by Fidelity). Or, you can fund the two accounts concurrently if you are confident you can fully fund the Roth IRA before the end of the year. Opening an IRA is better than an individual taxable account because you can invest in the same mutual funds offered by Vanguard, except that IRA are tax-privileged, saving you money in the long run.
3) Each year as you age, re-evaluate your asset allocation and ensure that you can “sleep at night” with the level of risk you (equity investments) you decide to go with.
Important Legal Disclosure: I am not a financial professional, and this does not constitute professional financial advice. Before acting on any ideas proposed here, you should consult your financial professional.
***Photo courtesy of http://www.flickr.com/photos/dimi3/3096166092/sizes/l/in/photostream/