A reader writes in with this question:
My fiance and I are getting married in Oct 2009. We have been together for 8 years now and we are both students. I am 23 and he is 22. We are both working on our masters degree and have accumulated students loans from our undergrad degrees. We do not have any children and live in a condo ($750 per month).
I do not work because I am totally/perm disabled from a car accident when I was 15 years old, however my fiance works at 2 different jobs and we average about $30,000 per year. We have been looking into retirement and savings plans for a while but there are so many to choose from that it makes my head spin.
My question to you is, what should we invest in? 22 and 23 years old, getting married, both students, no children, no credit cards/loans other than student loans and our bills average us about $2000 per month?
Before I say anything, of course I have to remind everyone that I am in no way a financial professional and I can't really give investment advice. But I'll throw out a few things that I might consider if I was in your situation!
The traditional advice for young people is to invest aggressively, meaning in a mix of investments that is as much as 90% in stocks, with a few more conservative fixed-income or bond investments balancing out the portfolio. Because you have such a long time before you can retire, you can ride out the ups and downs of the market, and theoretically should get returns over time that outpace inflation. Nowadays, some of the assumptions behind this kind of investing make people more nervous-- past history does not predict future results, and the stock market has been so crazy over the last year, who knows where it will go next. We could be in a recession/depression for years and maybe people who hoard their cash will end up doing just fine if there's no inflation. But over the next 40-45 years til this couple retires, a lot could change, and it's still probably a good idea to be invested in stocks over the long term.
So I'd say that if your employer has a 401k plan, make sure you are taking advantage of it, especially if the employer matches some portion of your contributions. You can start by putting in a small percentage of your pay, but keep an eye on that over time and try to increase it later. Pick a few funds that have varying degrees of risk so you don't have all your eggs in one basket. The choices of funds are perhaps what is making your head spin, but don't let it intimidate you. Most 401k providers have information that will rank the funds according to level of risk-- pick a couple from the top, one from the middle and one from the bottom and chances are you won't go too far wrong. Just do it and then take a hands-off attitude-- don't worry about watching it too closely at first. Just let that money start slowly accumulating, and worry about things like rebalancing your portfolio a few years later. You've got plenty of time.
But aside from that, here's the other thing you might want to think about as a risk-free investment: how about trying to pay off those student loans early? I'm not sure what kind of interest rates you might be paying and whether there's any possibility of having loans forgiven, but having less debt in your life is never a bad idea. Repayment of any debt is essentially an investment that guarantees you a return of whatever interest rate you were paying (or perhaps a little less if the interest was tax deductible). And becoming debt-free will give you a feeling of satisfaction that you'll never quite attain from looking at a 401k statement!
Those are my two cents-- whatever you decide to do, best of luck to you!
Any other thoughts or suggestions from readers out there? You are always great about helping each other!