Start young, retire early
I'm a recent college graduate with a good job, but no savings. Where should I invest so I can retire early? The Expert has some ideas.
By Walter Updegrave, MONEY Magazine senior editor

NEW YORK ( - I'm a 24-year-old recent college graduate who makes about $100,000 a year, but I have no savings. What's the best way for me to invest my money so I can retire by age 55?

-- Andrew Cruz, New York, NY

Before we get into how to invest your money, let's talk about something more important: getting into the habit of saving on a regular basis.

That's right, although most people tend to think of investing as the most important way to build wealth, the truth is that all the investing savvy in the world doesn't mean diddly squat if you don't have savings to invest.

First: Save save save

So your first order of business is to set up some sort of a plan to save a good portion of that $100,000-a-year salary.

You can begin by setting up an emergency savings fund. This money, which should be held in a savings account or a money-market fund or short-term CDs, should have about three to six months' worth of living expenses. The purpose of this account isn't to earn big bucks; it's to help you meet unanticipated expenses or, in the event of a layoff, to tide you over until you find a new job.

Once you've set up that fund, you can start building your retirement savings. Considering the kind of money you're making, I'd be surprised if your employer didn't offer a 401(k) or similar employee-savings plan.

If that's the case, sign up for it immediately and stash away as much as the plan allows. Not only will this rev up your retirement savings, you'll also get a tax break since the money you contribute isn't taxed until you withdraw it later on. Similarly, the earnings on your contributions go untaxed until you pull them out, preferably at retirement.

Alas, recent research from benefits consulting firm Hewitt Associates shows that fewer than a third of your compadres -- that is, workers age 18 to 25 -- who are eligible for a 401(k)-type plan actively participate in it. You do not want to be part of this group -- at least not if you want to retire comfortably, and certainly not if you want to have any hope of early retirement.

Once you're contributing to your 401(k), you should then look into doing a Roth IRA. This year, you can contribute up to $4,000 to a Roth -- people 50 and older can do $5,000) -- assuming you're eligible. Check out the exact eligibility requirements by clicking here. You won't get a tax-deduction for your Roth contribution, but you will get a nice tax benefit: your contributions and all earnings are tax-free when you pull the money out.

If it turns out you can't afford to max out your 401(k) and do the Roth, I suggest you contribute as much as you must in order to get whatever matching funds your employer is offering and then put as much as you can into the Roth.

And then, invest!

Now we get to the question of how to invest your retirement savings. Given your tender age, you can afford to be a pretty aggressive investor. After all, it's no biggie if your retirement stash takes a hit in the short-term. What really matters is building the biggest balance you can by the time you're ready to call it a career.

So this means putting the bulk of your stash in stock funds. Some advisers might even recommend that a person your age put all his money in stocks. I'm more a believe in hedging one's bets, so I'd recommend devoting at least a small amount -- say, 10 to 20 percent -- to bonds. This sort of mix will let you harness the long-term growth potential of stocks, but give you a bit of ballast when the market hits some turbulence.

For more specific advice on how to create a diversified portfolio of stocks and bonds, I suggest you do two things. First, go to our Asset Allocation tool. There, you'll take a quick little quiz and then get a recommended allocation.

Second, I recommend you check out the investment story in the Dream Retirement special MONEY published in November. In particular, you'll want to check out a part of that story titled "A plan for every stage", which lays out retirement planning guidelines for investors at various stages of their careers. You will want to read the section that deals with people in their mid-career (Yes, I know you're just starting out, but the strategy outlined for mid-career types is fairly aggressive, so it's okay for you as well.)

Finally, if you'd like some specific fund recommendations, I suggest you check out the MONEY 65, which is MONEY Magazine's elite group of recommended funds. You may not have access to all these funds in your 401(k). But you can apply the criteria we used in compiling the MONEY 65 to choosing the funds available in your plan.

So there you have it. Everything you need to get yourself on the road to that early retirement. Just remember, though. It all has to start with regular savings. Otherwise, your early retirement dream will remain just that, a dream.


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