GETTING STARTED An IRA Owner's Manual Max Out Your 401(k) What to Ask Before Buying an Annuity How Much Will Social Security Pay You? MORE... Sponsored By: RETIREMENT TOOLS Am I saving enough for retirement? How much will Social Security provide after retirement? The power of boosting 401(k) contributions Recent Columns An Enterprising 7-Year-Old - Feb. 3, 2005 Investing Resources for Teens - Jan. 27, 2005 Establish Money Rules up Front - Jan. 20, 2005 Save Now to Avoid Financial Aid Crunch - Jan. 13, 2005 Roth IRA Rules for Kids - Jan. 6, 2005 Parents Can't Tap Child's Custodial Account - Dec. 30, 2004 MORE ...

MONEY SMART KIDS
Retirement Saving Head Start
by Janet Bodnar

I appreciate your financial advice to twentysomethings, and I hope you can help me.

I'm 27 and am leaving my job to go back to school and switch careers. So far I have saved $17,000 in my company's 401(k) plan, but I won't be able to contribute any more during the three years it will take to finish my new degree. Will that put me behind in saving for retirement? What should I do with my savings while I'm in school? Right now it's in several stock mutual funds from Fidelity.

While in school, I may earn extra money as a freelance personal trainer. Can I contribute any of those earnings to a retirement plan?

First off, let me congratulate you on saving for retirement. If you never contribute another penny and your money earns 10% a year -- the historical average for the stock market -- your $17,000 will grow to about $770,000 by the time you reach retirement age in 40 years.

With that kind of a head start, don't worry about taking a few years off to go back to school. Getting a degree in the field of your choice is also an investment in your future. You'll be able to resume making steady contributions once you get back into the work force.

Meanwhile, if you're happy with your current 401(k) plan and your employer allows it, leave your money where it is. A diversified portfolio of stocks is a perfect investment for someone your age.

If your current employer doesn't want to hang onto your money, you can have it transferred to a rollover IRA, which is easy to open and lets you choose your own investments. In your case, you could open it with Fidelity and duplicate your current portfolio if you wish.

One thing you should avoid is cashing out your savings. Not only would you have to pay ordinary income tax on the money, you also would be hit with a 10% early withdrawal penalty. And you'd lose the future earnings that would have accrued on your savings.

If you earn money as a freelance personal trainer, you can open a self-employed retirement account. The simplest option is a Simplified Employee Pension (SEP), to which you can contribute up to 20% of your self-employment income each year. If you'd like to contribute more than that, consider opening a SIMPLE plan or an individual 401(k), both of which have higher contribution ceilings (see www.401khelpcenter.com).