Our 401(k) balances reached record highs last year. By admirably doing their part, young people helped make this happen. In fact, a recent study finds that young people are not only saving more money for retirement than the average worker, but they’re also doing so in a way that all investors should mirror.
According to Fidelity, 37% of employer-sponsored retirement plans offer a Roth savings option, up from 12% just five years ago. And the study finds that younger investors make use of the Roth 401(k) option the most. In fact, 10% of 401(k) participants in their 20s contribute to the Roth 401(k) option, versus just 6% of all participants. And employees who contribute to the Roth option also accomplish a higher savings rate, deferring an average of 11% of their salaries, versus the average rate that’s closer to half that percentage.
Better yet, young investors are employing some savvy retirement savings tactics. Nearly six out of 10 of these young Roth participants use a tax diversification strategy. Tax diversification refers to investing in accounts with differing tax treatments. Investors achieve this by saving a portion of their contributions in the post-tax Roth 401(k) in addition to setting money aside in the pre-tax 401(k) savings option. That way, investors will have flexibility in retirement and can be well equipped to counter the ever-changing tax environment.
No Roth 401(k)? No worries.
Because of the huge likelihood that taxes will be higher when they reach retirement and their long investment time horizon, young investors are beatifically positioned to benefit from the Roth. But if your employer doesn’t offer the Roth 401(k) option, you can still save money tax-free by opening a Roth IRA. As long as you qualify, you can contribute thousands of dollars annually. Also, in a Roth IRA, your investment options aren’t limited to what your employer deems best. You can invest in whatever stocks, exchange-traded funds, and mutual funds you like.
Because young people have decades to save (tax-free, no less) for retirement, you should invest the majority of your contributions in growth investments. These investments come with a higher level of risk but also boast greater return potential. For example, iShares Russell 2000 ETF opens up the exciting world of small-cap stocks, which over time have yielded higher returns than any other asset class. Meanwhile, Vanguard MSCI Emerging Markets ETF (NYSEARCA:VWO) gives you incredible exposure to the high-growth economies of developing market nations like China, India, and Brazil.
If stocks are more your thing, keep in mind that the best companies boast well-known products and lots of potential for growth. For example, Chipotle Mexican Grill, Inc. (NYSE:CMG)‘s well-liked and tasty products feed tons of burrito-craving people every day. But when it comes to the company’s international growth prospects, Chipotle Mexican Grill, Inc. (NYSE:CMG) has hardly fired up the burners. The company boasts roughly 1,410 locations, but only about a dozen of them are located outside the United States.