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Personal finance: Young investors have time

A trader takes an order in the Standard

A trader takes an order in the Standard & Poor's 500 stock index options pit at the Chicago Board Options Exchange (CBOE) following the Federal Open Market Committee meeting on Jan. 25, 2012 in Chicago, Illinois. Photo Credit: Getty Images

Young investors spooked by market volatility are continuing to shun stocks.

They shouldn't. Workers in their 20s and 30s have plenty of time to benefit from the magic of compound returns and to allow the market to bounce through its usual ups and downs.

Here are the six most important steps young savers can take to build retirement security:

Start early, start small. If you read no further in this article, absorb this point: Above all else, get an early start. Nothing will have a greater impact on your success, due to the effects of compound returns over time. This will be true if historical market returns continue -- even if you start small and even if there are bumps in the road.

"A retirement account contribution of $5,000 today at age 23 will be worth nearly $300,000 when you retire at age 70, assuming a 9 percent return," notes Bob Morrison, a financial planner in Denver.

Save as much as you can. Even if you start saving early, you should sock away as much as you can handle comfortably. Vanguard Investments found that the contribution rate -- along with the early start -- has a much larger impact on retirement success than market returns.

Don't cash out. Don't cash out your 401(k) when changing jobs. Instead, roll over the account to your new employer or a low-cost stand-alone IRA, or leave it in place if it's a good plan.

Get the match. Make sure to contribute enough to max out any matching contribution from your employer; otherwise you're leaving free money on the table. Research by Aon Hewitt found that 43 percent of workers in their 20s contribute to 401(k)s at rates too low to capture the full match.

"At a time when we're struggling to get 1 percent returns on CDs, young people are foregoing a 100 percent rate of return here," Morrison says.

Monitor fees. Over time, fees can take a big bite out of returns. Wherever possible, seek out low-cost index funds within your workplace plan; if no low-cost options exist, your plan may offer the option of a "brokerage window" that allows you to buy and trade whatever stocks, mutual funds or ETFs are offered by your plan's vendor.

Use a Roth. Consider contributing to a stand-alone Roth IRA with funds over and above your employer match. You can contribute up to $5,000 annually, no matter what you're doing in your workplace plan so long as your income is below $110,00 (single) or $173,000 (married). Roth contributions grow tax-free.

Mary Brooks, a planner in Colorado Springs, Colo., also suggests shoveling annual raises into your retirement account.

But I especially liked her caveat: "Of course, the very first extra money received should be used for an immediate pleasure -- dinner out, or a treat at a coffee shop. It's as important to reward yourself in a tangible way as it is to implement the retirement plan."

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