Retirement Planning for Twentysomethings

As a young adult who is at least 40 years away from retiring, what should I be thinking about retirement? I'm 26, I have a good job, and I contribute enough to my 403(b) to collect the whole match. I don't have tons of credit card debt but I do have a car loan and student loans. How should I balance paying off debt with saving for retirement? I haven't maxed out my contributions to my plan at work and I probably can't afford to right now, but I have extra money I could be saving. Should I care about IRAs?
--S., Boston

First of all, S. deserves tons of credit for getting started early. If you're under 30, you'd do well to follow that example. I used to work for a retirement plan provider and I've seen the trends: The number of people under 30 who are contributing to a 401(k) or 403(b) at all is very low -- way too low. And that's a shame, because the dollars you put away for retirement now are the most valuable dollars you'll ever save.

Consider: Every $1,000 you invest now at a 10% rate of return (a reasonable expectation for long-term stock market gains) will be worth just over $45,000 in 40 years. If you're a good stock picker (or find good mutual funds) and can average a 15% annual return, that $1,000 will be worth almost $268,000 in 40 years. (This, by the way, is why we Fools harp so much on the benefits of outperforming the market, and on seemingly small differences in investment performance over time. $45,000 is great, but $268,000 is really great.)

On the other hand, if you, like many of your peers, decided to wait another 20 years before you started saving for retirement, each $1,000 you invested would be worth just a bit over $6,700 20 years later. Big, big difference. So by starting early, you give yourself a huge advantage in the quest for a comfortable retirement.

Contributing enough to collect your employer's match (what we Fools call "free money") is another huge win. Hopefully, you can put that money into the stock market via the best investment choices available in your plan, while keeping an eye on how those choices are performing over time. At your age, you probably don't want to keep a significant portion of your portfolio in fixed-income investments unless your risk tolerance is really low.

Debt vs. investments
It's good to want to increase your rate of savings, but I'm kind of obliged to say that if you have any credit card debt at all, you should get rid of that before doing anything else -- and make sure your monthly cash flow is sufficient to avoid accumulating any new ongoing charges. Those with significant credit card debt -- more than they can easily pay off in a few months -- should run (don't walk) to the Fool's Get Out Of Debt Seminar before they do anything else. And if you have lower-interest debt like student loans or a car loan... Well, some would tell you to pay them off early if you can, but I would just continue to make regular payments and choose to get that "extra" money invested instead.

To IRA or not to IRA
IRAs come in several flavors, but the two biggies are "traditional" and Roth. (Learn about the difference here.) Someone in their 20s should care about IRAs if:

" They're contributing enough to your workplace plan to collect the full amount of your employer's match;

" They are able to contribute more; and

" They want the broadest possible range of investment choices.

Additionally, a Roth IRA can give you:

" An emergency fund, thanks to rules that allow you to withdraw your contributions (though not your investment gains) at any time without penalty;

but

" You'll lose the ability to deduct your contribution for tax purposes.

For most Fools, investing that extra money in an IRA offers a clear advantage. After all, would you rather choose your investments from a menu of 20 mutual funds or have the freedom to pick great stocks like Vail Resorts (NYSE: MTN), Sony (NYSE: SNE), or DreamWorks Animation (NYSE: DWA) all on your own?

Thanks for writing, S., and best of luck!