Roth IRA and/or Other Long Term Saving Advice

Mr Unoriginal

Mr Unoriginal

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So I'll start off by saying I understand this is a video game forum and not an investment forum, but CAGs have always been helpful in the past with all kinds of problems. With that being said...

My wife and I are both 27, we just purchased a home, both are employed and have no children. We both are in jobs where there is no 401k or any retirement plans available to us. Since we have relatively low expenses now and some pending tax return money, we wanted to start socking some cash away for 'the future.' We want something low risk, so no stock investments or anything like that. Obviously we thought about CDs but the interest rates suck so hard now, not sure if it is even worth it.

Any words of wisdom from the CAG community?
 
savings account, go with ING

roth IRA over a traditional IRA (your annual income may effect what you can do.

td ameritrade for stock fun.

find a job that matches 401k
 
Yep those are all good ones.

I have an ING savings--there are some other online options with similar or a bit higher interest rates--including some high yield checking. Just google best online savings and you'll find some Kiplinger articles etc. with links.

Roth IRA is better than traditional for most, as you pay post-tax income on it now, and when you're past the age limit you're not taxed on withdrawals then--which is great when you're retired and living on a tighter budget, don't have an income etc. Traditional IRA you contribute to pre-tax now (so lower your taxable income now) but pay taxes on withdrawals in the future. I'd rather pay more taxes while I'm young and working than at retirement age.

And yep, getting a job with a 401K and employer match (or above) is ideal. I have to contribute 5% of my paychecks to my retirement plan (can't go up or down) and the employer current contributes 9% (can go up or down, but not below 5% as it has to be at least a 100% match). Any type of employer match is free money, so try to find a job that does it.
 
I'm not sure if you're aware:

The primary difference between a Roth IRA and a traditional IRA is the way they are taxed. Roth IRAs are taxed upfront, when you make the contribution. Traditional IRAs are taxed when you withdraw the money - typically at retirement. I'm fairly finance-savvy, but I only use my employer's plan and don't use IRAs. That said, I'm not aware of any research that says one is better than the other, and I believe it's as simple as personal preference when deciding which one you want to go with. If you think your tax rates will be higher when you retire, you might want to go with a Roth.

The other thing you brought up is your risk tolerance. I'm not a financial planner, but I would strongly suggest that you reevaluate your stance on higher-risk, higher expected return investments. I would suggest you do some more research on the subject, because aside from how much you invest, what you invest in is one of the biggest decisions you'll make. Look up information about the power of compound interest and the huge implications it will have for your nest egg.

For me, I'm very risk-averse in my day-to-day financial life. I'm frugal (cheapassgamer, ha!), and don't own any stocks directly. However, I am invested in the most aggressive portfolio option my employer's plan offers. That particular plan is high-risk, high expected return, and has the benefit of diversification. All of the research I've done and education I've had suggests that the longer your expected time to retirement, the higher your risk tolerance should be, in general. Again, these are just thoughts and I encourage you to do your own research, but I really think you should take another look at that.

No matter what the rate on CDs, in general, they will usually not offer a higher rate than the rate of inflation. This means you can be saving your money, earning a percent or two on a CD, but inflation is typically higher than that. Then, in effect, you are actually still losing purchasing power on that money. Just something to think about.
 
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Good advice in these posts. I agree with the above poster. Look into something with some risk so your money (hopefully) makes money. Look into different mutual funds go from there.
 
Alright, thanks for the responses so far. I am very ignorant when it comes to finances, so bear with me.
Whe you say high risk stuff I'm assuming you are talking about stock investments right? If that's the case, would I be managing a portfolio, or hiring somoene to do it for me or is there something else I'm not considering?
 
Yep, being young, you'll want to choose a higher risk plan that tapers off risk as you age.

If you're like me and don't want to pay much attention to managing your funds, buying stocks yourself etc. there are lots of plans you can get that rebalance every quarter, adjust risk as you age and get closer to retirement etc.

For instance, the plan category I went with you just pick your estimated retirement year (funds are named with it--mine's Lifecycle 2040) and it starts high risk and gradually puts more of your money into safer categories as you get older.

So right now it's mostly stock, as you get older it will shift to bonds and other safer investments. And the fund changes the allocation every quarter (what stocks you have etc.) so you don't have to deal with it yourself.

People who know what they're doing (know the market etc.) will come out ahead micromanaging their funds their selves. For the rest of us, such funds like I have (and/or having a financial advisor) are the way to go. I just want to have enough to support myself until retirement. I'm not super money driven, so I don't care about maximizing profit over my lifetime etc. Just living very comfortably from now until death.
 
I'm really not sure what the investment options are like when setting up an IRA through a commercial bank. With most employer-sponsored retirement plans, there are a handful of structured options to chose from. These options are portfolios of investments that have different expected risk/return profiles. These portfolios are managed by professionals; the individuals saving their money do not do any of the day-to-day trading.

I think commercial banks might offer these types of options through their IRAs, but you would have to check.

Higher-risk investments do generally include stocks (also known as equities). Bonds are usually less risky than stocks.

If you pick a structured investment option in your retirement plan, it will be a mix of different stocks and bonds that will be designed to target a given level of expected risk/return.
 
[quote name='Lieutenant Dan']I'm really not sure what the investment options are like when setting up an IRA through a commercial bank. With most employer-sponsored retirement plans, there are a handful of structured options to chose from. These options are portfolios of investments that have different expected risk/return profiles. These portfolios are managed by professionals; the individuals saving their money do not do any of the day-to-day trading.

I think commercial banks might offer these types of options through their IRAs, but you would have to check.

Higher-risk investments do generally include stocks (also known as equities). Bonds are usually less risky than stocks.

If you pick a structured investment option in your retirement plan, it will be a mix of different stocks and bonds that will be designed to target a given level of expected risk/return.[/QUOTE]

So it sounds like a visit to the bank is in order. Neither of us will probably ever have jobs where there will be an employer sponsored retirement plan, but like you both mentioned, I don't want to micromanage it, rather set up some paramaters that a professional would follow.

Generally is there a fee for this or do they just get something off the top of what I earn?
 
[quote name='dmaul1114']People who know what they're doing (know the market etc.) will come out ahead micromanaging their funds their selves.[/QUOTE]
Actually a lot of evidence suggests that most individuals, regardless of whether they think they know the markets, cannot beat the market over the long-term. When you adjust for taxes and for time spent micromanaging, it makes an even stronger case for investing in the way most of us are explaining to the OP.

Otherwise, good points in your post.
 
[quote name='Mr Unoriginal']So it sounds like a visit to the bank is in order. Neither of us will probably ever have jobs where there will be an employer sponsored retirement plan, but like you both mentioned, I don't want to micromanage it, rather set up some paramaters that a professional would follow.

Generally is there a fee for this or do they just get something off the top of what I earn?[/QUOTE]
As far as the funds themselves, they should have some sort of fee/expense ratio they can show you. Since most of these things are managed on such a large scale, the fees are usually pretty reasonable (we're talking tenths of a percent). You don't pay these out of pocket; they are expensed within the fund.

I'm not sure if they would charge you anything to set up your IRA.
 
depending on the bank you do use you can have as much or as little control over the investment as you want. if you want youll be able to get one that is just structured a certain way and all you do is make deposits.

also depending on where you go there will be various fees, minimum balances, etc
 
[quote name='Lieutenant Dan']Actually a lot of evidence suggests that most individuals, regardless of whether they think they know the markets, cannot beat the market over the long-term. When you adjust for taxes and for time spent micromanaging, it makes an even stronger case for investing in the way most of us are explaining to the OP.
[/QUOTE]

Very true. I just was being a bit cautious not to offend any of the day trader types--and there are one or two who post here.

For me, I just don't have the time or interest to mess with it, regardless of whether or not I could come out on top, so that's where my advice comes from. Even if I thought I'd beat the market, I wouldn't screw with it as my times more valuable than having more money at retirment.

Hell I've been meaning to rollover my retirment account from my last job to my current (both with TIAA/CREF, both the same 2040 lifecycle fund) but have put it off for months as there was a bunch of paperwork they needed from my old university and I haven't had the time or energy to screw with it yet.
 
[quote name='RAMSTORIA']
roth IRA over a traditional IRA (your annual income may effect what you can do.

td ameritrade for stock fun.
[/QUOTE]
You can actually kind of combine these two. I have a Roth IRA with TD Ameritrade. It's pretty much just like a regular brokerage account, I can buy or sell stocks and mutual funds with it. I put $5K/year into it to play with. Made some bad decisions when I first opened it and bought some crappy stocks (Lucent, Dell, 3dfx) so now I pretty much just stick to mutual funds.
 
For the love of God, do NOT go to a bank to invest in an IRA or any other retirement vehicle. Banks will hit you for maintenance fees, load fees, transfer fees, and just about any other fee you can think of. They will charge for every single service they offer.

Personally I have IRA's at Fidelity and Vanguard. Both places have several "target" funds, that have been described above. These are no load and have very low expense ratios. You do not have to manage a target fund. You pick a fund around the time in which you expect to retire and just continuously invest in it. A few have a minimum amount to invest (say $2500), but they will waive the minimums if you contribute to the funds each month.

You do NOT want to invest in single stocks unless you have a lot of knowledge in the market and have multiple thousands of dollars to invest. An ETF is 9 times out of 10 the way to go if you just want to track the markets ups and downs. You can make very good money at playing the market, but you'll need to educate yourself much more in order to even think about going that route. Everyone can get lucky but it takes real skill to come out ahead time and time again.

Finally, if your workplace has it (which yours doesn't OP), max out your 401k if you can afford to do so. I max mine out every year. The max changes every year and is currently $16,500. If you combine this with a roth IRA (or traditional) you can really sock some good money away for retirement each year.
 
As every finance professor I have ever had said "When you're young, go for high returns. You have time on your side if money is lost". You'll want to get conservative down the line (when you have more bills, kids education to save for, etc...). Going for high returns now will make a much bigger difference down the line (compounding interest and such).
Pay someone to manage the portfolio of stocks (or better yet pick an indexed fund, they generally outperform professionally managed funds and have lower cost structures.)
 
Go to Vanguard, pick an IRA with your target retirement year and then just drop your money in there. They are very diversified and will shift assets around for you appropriately the closer you get to retirement. They also have one of if not the lowest expense ratio of mutual funds around. Wherever you go double check what kind of fees or minimums you need to set up an account but buying shares in a mutual fund (which is managed by professionals) would certainly be the best way for you to start off your IRA.
 
No Dave Ramsey advice yet? I'll put some in.

1. Put $1000 in the bank. (Assuming your spouse will let $1000 sit in a savings account.)

2. Pay off all of your bills except your mortgage. (There's no point in putting money away unless you may leave your wife and need some "seed" money.)

3. Put 6 months of your expenses in a savings account. That can be 6 - 6 month CDs, a money market account or bags of money stored in your freezer.

4. (I assume you're here.) Put 15% of your money towards retirement funds. You'll need something that will outpace inflation. So, mutual funds that have been around for decades and returned about 10% over the last 10 years at least.

5. Pay for any child's college education. (You don't have kids now. So, you can skip this.)

6. Pay off your mortgage.

7. Finish off a retirement fund.

8. Help others.
 
Yeah, my parents use Vanguard for all their retirement stuff and have nothing but good things to say about them.

My stuff is with TIAA/Cref now being in higher ed--wanted to go with a company that most universities have so I can easily roll stuff over when I change jobs etc. They've been great so far.

I have a little bit of money (maybe $700 now) in a Roth IRA with Amerprise. But it sucks, it never made money the three or four years before the economy tanked and dropped a good bit to where it's at now. It's on my to do list to close out and either put in savings or find a better IRA with TIAA/Cref to start contributing to, as I just don't see the fund it's in ever making much money as it's just sucked since I opened it in 2004.
 
My only beef with Vanguard is some of the fees that they charge, depending on what you're looking for. I have my current work 401k through them and they're charging account fees on that. That's kind of fucked up since we as employees have no further control over it other than to choose what to pick to invest in.
 
Yeah, that does suck. I was lucky as most universities have several retirement companies to choose from. I think we had 3 here, TIAA/CREF, one other that's eluding me, and the state teacher's plan (a pension more or less) so at least we had some options.

We had more to choose from at my last university (where I had a research faculty job my last year of grad school), went with TIAA/CREF as the fee's etc. were fine and most Universities offer accounts with them, so roll overs are easy--which is important with the nomadic nature of an academic career.
 
Awesome responses so far, thanks guys. I wil definitely check out Vanguard today as we're snowed in yet again.

What is the TIAA/CREF and other categories everyone is mentioning? Types of IRA accounts?
 
[quote name='mtxbass1']For the love of God, do NOT go to a bank to invest in an IRA or any other retirement vehicle. Banks will hit you for maintenance fees, load fees, transfer fees, and just about any other fee you can think of. They will charge for every single service they offer.
[/QUOTE]

this.
 
I'm not sure if this has been posted yet, I'm too lazy to read the entire thread. There are some reward checking programs that are offering around 4% interest rates up to 15K. That might be a good place to start since you're looking for something that's low-risk.

Take a look at this thread on FW:

http://www.fatwallet.com/forums/finance/783099/

Also, check out the finance forum there. There are some pretty savvy finance people on there and I've learned quite a bit just from reading the posts. I'm sure there are other strictly finance boards out there, but this is the only one I go to since I get my deals from there too. :)
 
[quote name='Mr Unoriginal']
What is the TIAA/CREF and other categories everyone is mentioning? Types of IRA accounts?[/QUOTE]

They're just an investment firm like Vanguard and others. They have 401K type accounts (higher ed equivalent), IRAs etc. etc.

They only work with certain companies though--most universities/colleges, some other schools, research institutions, some non-profits etc. So they're not a company anyone can use like Vanguard. Well, maybe the IRAs and stuff for individuals are open to everyone (not sure), the employer retirement accounts are only in those industries (the 401K equivalents).
 
When does interest apply on an IRA account from Vanguard for instance. On their site they have some figures for their Target Retiremet Fund that I would fall into. I would be putting in the max of $5,000.

It lists:
SEC yield as of 02/25/2010 2.31%
YTD as of 02/25/2010 –1.15%
1 year 28.31%
3 year –3.39%
Since inception (06/07/2006) 0.73%
Acquired fund fees and expenses as of 01/26/2010 0.20%

I feel dumb, but what the hell does all this mean?
 
[quote name='Mr Unoriginal']When does interest apply on an IRA account from Vanguard for instance. On their site they have some figures for their Target Retiremet Fund that I would fall into. I would be putting in the max of $5,000.

It lists:
SEC yield as of 02/25/2010 2.31%
YTD as of 02/25/2010 –1.15%
1 year 28.31%
3 year –3.39%
Since inception (06/07/2006) 0.73%
Acquired fund fees and expenses as of 01/26/2010 0.20%

I feel dumb, but what the hell does all this mean?[/QUOTE]

Interest starts the moment that you make money. The second that your $5000 investment turns to $5000.01.

SEC yield is typically a 30 day yield.
YTD is year to date yield.
1 year, obviously is the yield over the past full year.
3 year...

Since inception means since the fund was first created.
Fund fees and expenses are 0.20%.

Whatever this is you're looking at, it doesn't seem all that good.
 
[quote name='mtxbass1']Interest starts the moment that you make money. The second that your $5000 investment turns to $5000.01.

SEC yield is typically a 30 day yield.
YTD is year to date yield.
1 year, obviously is the yield over the past full year.
3 year...

Since inception means since the fund was first created.
Fund fees and expenses are 0.20%.

Whatever this is you're looking at, it doesn't seem all that good.[/QUOTE]

That is what Vanguard if offering right now for a Roth IRA where I select how long until I retire.
 
[quote name='Mr Unoriginal']That is what Vanguard if offering right now for a Roth IRA where I select how long until I retire.[/QUOTE]

Are you looking at VTIVX?

If so, that fund is very young. The 5 year return is about 2%, which is pretty terrible. Then again, we've just come through one of the worst financial times in history.

Remember this. You won't be touching this money for 35+ years in your case. A lot can happen in that time. The point is to first just contribute to an IRA and ride the wave. You're not going to get rich quick by investing in mutual funds, and even if you did, you couldn't withdraw it until near retirement without paying a huge penalty.
 
Not so fast on the Vanguard option, guys.

OP, to really compare different options, you have look at them over the same time period. As someone mentioned, we've just come through the worst recession since the Great Depression. Pretty much anything you look at is going to have a pretty terrible return for the latest three and five-year periods. Take a look at the three and five-year returns for the other options you're considering, then compare apples to apples.

Someone else mentioned the fact that this is a younger fund. Maybe you want something with a longer track record. I, personally, wouldn't mind if a fund is younger if it is coming from a name like Vanguard.
 
[quote name='mtxbass1']The 5 year return is about 2%, which is pretty terrible. Then again, we've just come through one of the worst financial times in history.
[/QUOTE]

Yep that makes it really hard to judge recent performance, and impossible to get a sense for young funds, and pretty much everything lost money (or made very little) the past couple of years.

So to some sense, you're probably safer to find a fund that's been around longer, and see how it did in say the 5 years prior to the 2008 meltdown, if it was strong up to that point, it's probably likely to bounce back and stay strong until the next collapse.
 
I have my Roth IRA at ING Direct (Sharebuilder). I don't know if it's the best option or not but they've been very good to me. I only have a small amount in my Roth so far and I still have substantial amounts in my savings. I'm kind of reluctant to move too much into the Roth until I've gotten my first home.
 
Yeah, that's why I've not rushed to deal with my Ameriprize IRA that's lost $300 or so from the initial $1000. It's stablized and is building back up a bit, and I wouldn't be contributing it anyway.

And mainly because I wouldn't be contributing to it in the near future anyway as my focus is on building savings since I just finished grad school and started making real money.

Need that rainy day savings, especially being an academic since I'm on a 9 month salary and summer pay is dependent on grants, or summer teaching (which I hate doing etc.). At least we get our 9 month salaries paid out over 10 months which makes budgeting simpler, and I get 1 month of summer pay my first 3 years from my department, so I at least only have one month with no paycheck to worry about for a while. Have a couple grant/fellowship apps out to try to pay that month this summer.

And like you, even without that worry, I need to start building up savings for an eventual downpayment on a house once I have tenure somewhere and can settle down.

So I wouldn't be salting away money in an IRA. Thankfully my retirement account (higher ed version of 401K) is damn good and is getting around $250 from me each month and a bit over $500 contributed by my employer each month so I'm getting a good bit put into my retirement anyway.
 
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