How Aggressive Should A 22 Year Old Be With Retirement Funds?

Woohoo! I fully funded my 2009 Roth IRA yesterday after taking $3,000 out of savings and sticking it in my Vanguard account. The great thing about that is that I now am eligible for many more funds. Until today, I’ve been using their STAR fund, which is basically a mutual fund of mutual funds. I’m willing to take more risk and will be researching some of the other options. Any suggestions?

I’m not worried about my emergency fund dwindling (It’s at about 1 month’s expenses right now) because the next 6 weeks will be the best ever. Not only does my pay raise go into effect then, and not only will I be getting $868 back from the federal and state governments, but there are 3 pay periods in April this year! The calendar just happens to work out that way, but it will be a nice boost for my savings plan and it’s going to put everything back in its place and then some.

Here are some of the mutual fund options I’m considering:

Vanguard Target Retirement 2050 (VFIFX): This life-cycle fund includes several other index funds and will change its allocation by reducing stocks and increasing bonds around 2026. It’s the least involved options I have because it will automatically change its investments as I age. There is a 0.20% acquired fund fees for this fund.

Vanguard 500 Index Fund Investor Shares (VFINX): This domestic stock fund invests in stocks in the S&P 500 index. The expense ration is 0.18%, meaning that for every $1,000 I have invested, Vanguard takes $1.80.

Vanguard Emerging Markets Stock Index Fund Investor Shares (VEIEX): There are higher fees for this fund (0.40% expense ratio, 0.25% redemption fee, and 0.50% purchase fee) and it has a higher risk level that the other funds, which also could mean more of a reward. The international stock fund invests in stocks in emerging markets around the world, such as Brazil, Russia, China, Korea, and Taiwan.

Finally, I have the option of investing in Berkshire Hathaway Class B stock through my employer, which is owned by Berkshire Hathaway and the amazing Warren Buffett. It has done extremely well this year (24.71% YTD returns, while none of the other options I listed have gained more than 5%), but will it continue to rise?

There are many other options, such as the growth index funds, mid- and small-cap funds, and others, but I wanted to highlight these specifically.

Given my time horizon (age 22), which of these investing options should I take? I’ll share my thoughts later in the day. Keep in mind that this isn’t the only time I will be putting money in my retirement account!

11 Responses to How Aggressive Should A 22 Year Old Be With Retirement Funds?

  1. We’re in our mid-twenties now and have been invested since we were 22. My 401k is in the Vanguard 2035 target date fund and our current Roth IRA is in the Fidelity 2040 target date fund. Both have done well. Our Scottrade account is spread over individual stocks and our next Roth IRA will be invested into individual dividend stocks as well (like Johnson & Johnson and Pepsi).

    I’m sorry I can’t point you in the right direction since we’re also figuring it out as we go. I like target date mutual funds since they are so hands off. My husband likes dividend-yielding stocks that have a history of slow and stable growth.

    Good luck!

  2. myfinancialobjectives says:

    First of all, CONGRATS ON THE RAISE! I too just started receivingmy new raise payments and it is an amazing feeling (just don’t get too generous at happy hour like I did haha)… As far as mutual funds go, I speak directly to my friend of the family on those matters, he has done amazingly well, and knows more than I could ever dream of knowing in that field. So basically sorry, no help there haha:) But congrats on the raise, impressive during these times!

  3. You might want to go a step further and compare each fund with BrightScope. It is a service that PTMoney found.

  4. Dr Dean says:

    Daniel, I think first off-congrats for asking the question. That means you are in the 1% or less for your age group. How do you like being weird????? :)

    The great thing about being young is you can make mistakes and get away with it.

    That being said, I would recommend your stepping back and developing an overall plan of what do to with your retirement money. Develop a plan of a percentage in stocks, a percentage in bonds, or fixed income, and probably a mixed commodity fund of some sort, to get ready for inflation likely to hit in the next few years.

    Once you have a plan, then just have the money moved automaticaly if possible from your savings account.

    I think all the options you mentioned are sound. I have had Berkshire shares for years, and it is not always exciting, but tends to go up more than down.

    Emerging markets are probably due for a correction, but if you are dollar cost averaging, that doesn’t matter as much, then if you were going to just put a large lump sum.

    The other thing I would recommend, is begin to build wealth outside of your retirement plan. I know it means more taxes, but it also gives you freedom. You never know when those tax free plans-IRA’s, etc will have the rules changed by the feds. I am not a conspiracy theorist, but I think saving money in your own accounts along with the retirement options would be wise.

    Good luck!

  5. Austin says:

    I just got my girfriend to pull the trigger on a Roth with the VFIFX. It’s so easy and you can’t deny the low fees. I have my Roth in the Vanguard Total Stock Market Index, which doesn’t change as time goes on, but it doesn’t deal w/ bonds like the VFIFX.

    I didn’t know you were so young, Daniel. Under 25 bloggers unite!

    Austin @ Foreigner’s Finances

  6. Early Retirement Extreme says:

    It depends on what your time horizon is! 28? 38? 48? 58? 68? 78?

    • Daniel says:

      @Early Retirement Extreme, As much as I’d love to say 28…I doubt anything before 58 is realistic, and even that may be a stretch. As much as I think I’ll be able to save a significant amount, I assume that family will come with many more responsibilities than I even realize.

  7. FinEngr says:

    Dan,

    Since Vanguard has such a low turnover rate, you can create your own “target” retirement fund to mimic theirs, but adding a little extra aggression (something I’ve been thinking about as well). Depending on what that model portfolio looks like, the fees should come out close to their fund. Reviewing once every 6 months should keep it aligned with their adjustments.

    Plastics my young boy – PLASTICS!

  8. FinEngr says:

    Forgot to ask…Can you get preferred Berk?

    If so, buy a few gazillion shares…

  9. I didn’t know you were so young!! Awe man, I feel so old now! Under 25 club.. =( I’m turning 27 this year!

    Congrats on the raise! =)

  10. JT says:

    A 22 year old should be near wreckless, in my opinion.

    Fixed income yields are in the toilet, and holding them to maturity will net you a low return. On the other hand, selling out during a period of rising rates means you lock in the negative convexity.

    Go for broke!

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