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FEAR FACTOR
Market turmoil frightens off young investors, but it’s actually good to get in when stocks are down

BY MARY PILON
The Wall Street Journal

The saving and investing habits of young workers have always been dismal. And the recent turmoil in the stock market isn’t helping matters.

CLIP AND SAVE

Opportunities are rife for young investors in a beaten-down market. Some tips:

Contribute enough to your company’s 401(k) plan to capture the full matching contribution.

If you’re not eligible for a 401(k), start a Roth or traditional individual retirement account.

Don’t be too conservative. Younger investors have time on their side and can recover from short sputters in the market.

Only 49% of eligible workers in their 20s participate in 401(k) retirement-savings plans offered through their employers, according to a 2007 study from Hewitt Associates. And fewer than 20% in this group are saving anything at all for retirement.

“I don’t even have one K, let alone 401 Ks,” quips Zack Teibloom, a recent college grad who works as an editor for a small magazine in Chicago. “I’m worried that if I put money away, it won’t even be safe the way the markets are going.”

But the recent decline in stock prices actually favors young investors, because it means the shares they buy are relative bargains, and have more room to grow in the decades before they hit retirement.

EASIER TO START

Recent changes may make it easier for some younger employees to begin building a nest egg. Two years ago, Congress altered the law to make it easier for employers to automatically enroll workers in the companies’ retirement-savings plans. Employers can deduct money from workers’ paychecks and invest it in a number of conservative investments, such as so-called balanced mutual funds, which hold both stocks and bonds. Employers often set the deduction rate at 3% of workers’ salaries.

Some employers automatically enroll workers at a higher deduction rate to ensure they get the full company match—the amount the employer itself contributes into an employee’s account. Some also automatically increase their workers’ contribution amounts each year. Employees have the option of opting out of these automatic retirement-savings plans, but few do.

The law is having an impact. Fidelity Investments, which runs retirement plans for 16,700 companies, says that as of June, 2,343 plans had automatic enrollment, up from 723 plans the year before.

Other financial-services firms are targeting younger people in their marketing. Charles Schwab, for example, has been running ads for various products—such as its High-Yield Investor Checking Account, which is linked to a brokerage account—in TV shows like “30 Rock” and “Heroes,” which appeal to a younger audience. It’s also buying print ads in magazines like Shape and Men’s Health, and it has revamped part of its Web site (www.schwabmoneyandmore.com) with graphics, interactive tools and a glossary of basic financial terms. Schwab says it has seen an increase in younger clients since the campaign began, but declined to release specific numbers.

POWER OF COMPOUNDING

As experts are quick to point out, young workers don’t necessarily have to save a lot to have a big effect on their future retirement savings. Over time, the power of compounding will amplify the growth of money you save when you’re in your 20s. For example, if you invest a modest $100 a month for 40 years in an investment account earning 7% annually, your $48,000 in investments will end up yielding more than five times as much— $262,000.

Still, 40% of workers in their 20s end up withdrawing their 401(k) savings in cash when they switch jobs, rather than rolling it over into a new retirement account or leaving it in the old account and letting it grow, according to a recent Fidelity study. And they’ll switch jobs between seven and 11 times in their careers, says Scott B. David, president of workplace investing at Fidelity. By withdrawing the money as cash, they incur penalties and taxes, and they forgo any future investment gains that money would have generated.

The message has gotten through to some young people. Sekhar Suryanarayanan, 25, a business analyst at Deloitte & Touche in San Francisco, contributes 10% of his salary to a retirement account and gets a 6% match from his employer. “I feel a sense of urgency and nervousness about retirement,” Mr. Suryanarayanan says. “But saving was something that was pounded into me by my parents.”

START SMALL

Many young investors aren’t aware that even if they’re not eligible for a 401(k) through work, they can still start investing on their own through an IRA. Accounts can be opened with as little as $50.

“There’s a misconception that you need a large amount of money to get started,” says Ilkay Can, director of acquisitions at Schwab. “But you don’t.”

Kevin Cronin, 27, a public-relations associate in New York, isn’t eligible to join his company’s 401(k) plan until next summer, but he continues to contribute to a different kind of retirement account called a Roth IRA, which he opened in 2003 when he left college. Mr. Cronin is undeterred by the recent swings in the stock market.

Mr. Cronin meets with a financial adviser at the end of every quarter to fine-tune his mix of investments, and says he tries not to pay too much attention to financial news. “It’s a long time horizon,” he says. “I’m just going to screw it up if I try to micromanage it.”