Financial Planning 101: Save on autopilot for retirement

You can put almost any task on autopilot: making the morning coffee, driving on a stretch of highway and paying bills.

Automatic investing also could become commonplace, especially for twentysomethings (that's us).

A study last month by Prudential Financial Inc., a financial services firm based in New Jersey, found that 66 percent of workers ages 21 to 30 would like to be enrolled automatically in a defined-contribution plan at work, such as a 401(k) or 403(b). (Go us!)

The same number of young workers also favored having their rate of contribution increased automatically every year, as well as have the asset allocation — the mix of stocks and bonds — adjusted for them.

Granted, Prudential, which manages 401(k) plans, has an interest in seeing more people contribute to retirement plans.

But the study indicates that young workers understand the importance of saving for the golden years — and that they may need a little help doing it.

''They've seen [from the generations in front of them] that the traditional do-it-yourself approach isn't achieving the retirement security needed,'' Deanna Garen, senior vice president of strategy and planning at Prudential Retirement.

''They want to be in an autopilot program that's making decisions for them so they don't have to worry about, 'Gosh, do I really know everything I need to know here?''' she added.

A federal law passed this summer makes it easier for companies to put a 401(k) or 403(b) plan on autopilot for workers. In fact, in a separate survey in October, Prudential found that 87 percent of companies for which it manages 401(k) plans were interested in adopting automatic features.

If your employer doesn't yet, here's how to make investing for retirement as effortless as possible:

• Sign up for your 401(k) today. The advantage of participating in your employer's retirement plan is that the money comes out of your paycheck automatically before you get a chance to miss it. Ideally, put in the maximum amount matched, usually 3-5% of your pay before taxes. You double your money automatically. I can't think of a sweeter deal that has a 50% plus return. It's free money. If it's just too painful to bear, sign up for the plan when you get your next raise which is usually 3% or more if you're lucky. You'll never miss the money.
  

And thanks to the power of compounding, the more time you have to invest, the less money you need to put away.

Say, for example, you shuttle $40 every other week to your employer's retirement plan for 40 years. Assuming your investments earn an 8 percent return annually (which is about right if you have a good mix of mutual funds), you'd accrue nearly $270,000 by the time you're ready to retire. And $40 is a little on the low end, most of us can spare a bit more.

Wait a decade to start making contributions, and you'll have to sock away more than double the amount each paycheck to get the same sum.

• Invest in a target-date retirement fund. If you need help allocating your investments, consider a target-date retirement fund.

Here's how it works: You pick a fund whose date matches when you want to retire, such as 2030 or 2040. The fund invests in bond and stock funds based on that retirement date, automatically adjusting the mix so that you don't carry too much risk as you get ready to retire — or invest too conservatively when you're just getting started.

In other words, it's a way to have professionals manage the portfolio for you without having to pay the steep costs.

Plus, more employers now offer this type of fund.

• Don't worry that you're not a pro. Finally, some young workers wait to jump into the market because of inexperience. Don't let the market intimidate you.

Another way to save for retirement is to open a Roth IRA. Currently if you meet the requirements (which most of us as young professionals should) you can contribute up to $4,000. The benefit of the Roth IRA is that even though you pay taxes on it now, as it grows you won't pay taxes on it later. This makes perfect sense for young professionals who are usually in the lower or middle income tax brackets.

More here.