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Newb at Saving For Retirement
evilmrhenry
Registered User regular
Registered User regular
Now that I'm actually making more than minimum wage part time, I'm starting to think about saving for retirement. Only problem? I don't even know where to start. So:
Earning a bit above $30,000/yr. Expenses are low.
26 years old, no plans for early retirement.
Employer doesn't have any resources for this. I should be able to get money automatically taken out of my paycheck, though.
No debt.
Living in Washington State.
Earning a bit above $30,000/yr. Expenses are low.
26 years old, no plans for early retirement.
Employer doesn't have any resources for this. I should be able to get money automatically taken out of my paycheck, though.
No debt.
Living in Washington State.
evilmrhenry on
0
Posts
There are really 2 kinds of IRAs that are applicable to you (there is one more, but you don't make enough money to worry about it) - Traditional and Roth IRAs.
You are limited to $5,000 contribution to these combined per year.
Traditional - Tax-free dollars at time of contribution. Interest and increase in principle is taxed upon withdrawl. If you think you will be in a lower tax bracket when you withdraw these funds, then do this. Also if you have an AGI > $65,000 this one will be your only option.
Roth IRA - Taxed on dollars at time of contribution (so no favorable income tax treatment like traditional), but income and increase in principle is tax-free when withdrawn. If you believe you will be in a higher tax bracket when you withdraw the funds than you are now, then choose this one.
You can't really withdraw any monies from an IRA until you are 59.5 years of age. Some exceptions exist for first time house buyers, medical expenses, and whatnot though.
I also suggest asking at work if they have a 401(k) plan.
edit: By tax-free dollars on the traditional, I mean you can take any contributions to a traditional IRA as a minus to your adjusted gross income (AGI) on your 1040. This also has the bonus of potentially knocking you into a lower tax bracket (from 25% to 15%). However, making 30k gross, before deductions and exemptions you will fit perfectly into the 15% bracket without worrying about this adjustment.
They don't.
What sort of fees would be appropriate for an IRA?
Not quite sure what fees are levied, if any, at time of withdrawl. This will all be in the prospectus though. WHICH YOU SHOULD READ COMPLETELY AND CAREFULLY.
Fees... that depends on who you go with for a brokerage. There are "Loaded Funds" these have a fee either on the front end or the back end depending on which class you use. these are typically for Adviser sold funds and go to pay the adviser for his services. At your dollar amount i don't recommend this option.
you can also go with no-load funds, which have no charge for purchasing them. Many brokerages offer this, Fidelity, Charles Schwab, Edward Jones. Just call the 800 number and they will start you on the path. There is typically no account fees. The fund company gets paid because they take a small management fee from the funds. this comes off the earnings of the fund and reduces the yield, not out of your account. It is important to take a look at these management fees as similar funds can have widely different management fees which will effect the performance of the funds.
They will also help you decide how to allocate your funds, it will be fairly basic though. An adviser will do a better job (maybe their quality varies widely) but will cost more. At your age, you will likely see a high allocation to equities with a smaller allocation to bonds or cash.
Lastly, i have a question for you. Have you established an emergency fund that covers 3 to 6 months of your expenses? I highly recommend this. it will give you great peace of mind, and will make sure that you never are tempted to dip into your new IRA to cover an unexpected expense.
Yeah. No problem there.
What sort of management fees would be normal?
Management fees can depend on what type of fund you are looking at but in general. An equity fund should be around 1% or less, with a variance of .10% plus or minus. For a bond fund i would look to keep it below .50% or less again, round numbers.
Typically the more actively the fund is management, the higher the fees will be. Equity funds buy and sell their underlying securities more then in bond funds.
I have a fair amount of experience with Fidelity funds, their website has a lot of good info. Check it out www.fidelity.com If this is your first foray, it can be a lot to take in, i highly recommend talking with someone, a friend or a family member who has no financial steak in your decisions to help you make sense of it. The management fee is just one of the things you will want to consider.
i want to be sure i am not spooking you. Don't get overwhelmed, remember its a long term investment and it will go down as well as up, pay attention and if its time to reallocate do it. I lost 40% last year in my 401k, it was one of the worst years ever! but like you i am young and the low prices are a good buying opportunity. You are already in the lead because you skipped that huge correction!
Alright, if I've got this right, the actual IRA shouldn't haven't any fees (except for low-balance fees and similar), but from the IRA, I'd be investing in various mutual funds/stocks/index funds/bonds/chickens. Those would have various fees, but those fees would be taken out of the (hopefully existant) earnings.
Once money is in the IRA, I can move it around to different products, I just shouldn't convert into cold hard cash until retirement.
I'm planning on a traditional IRA, as I'm just poking into the 25% income tax bracket, and can't imagine *retiring* in a higher bracket. (Next bracket up: $82,250)
Fidelity looks like they have a $2500 minimum starting balance on IRAs. I assume this is normal. (It looks like that's bypassable, but then the funds have minimum starting balances as well.) I can pay this now, but that would mess up my emergency savings. I'm going to wait for my next paycheck.
I'm not quite sure how to physically get money from me to the IRA. Do I have work cut a check to the IRA place from each paycheck? Do I write a check? Paypal?
Anyway, my plan so far is to wait for my next paycheck, get a Fidelity traditional IRA, drop $2,500 into it, and use that for the minimum on the "Fidelity Freedom 2040 Fund"
http://personal.fidelity.com/products/funds/mfl_frame.shtml?315792101
From there, I'll drop more in there for a few months, making sure to hit $5,000 by April. After I have a bit more than $5k, I'll move money out and into another fund, to give a bit or redundancy, and take it from there.
edit: $8,350- $33,950 is the 15% bracket for single filers - im assuming you are not married or head of household. Take your 30k gross less personal exemption of $3,650 and standard deduction of $5,700 plus misc. adjustments (maybe you paid some student loan interest?) you are firmly in this bracket. Also realize that when/if you get married your 15% bracket for married is much wider and that brackets are adjusted for inflation - so in 40 years, who knows where you will be.
tl;dr - go roth
http://www.investopedia.com/terms/r/rothira.asp
http://www.investopedia.com/terms/t/traditionalira.asp
There are other good funds out there as well, don't just go with Fidelity because it's the most widely known and it has lots of commercials on TV. Check out investopedia and Morningstar instead of rushing into things.
I also Third or 4th the Roth, keep in mind that the principal and interest will be tax fee when you retire. If all goes well, you should have a great deal more interest then principal at that time.
As a note freedom funds are a great set it and forget it option for investing, but as Robo pointed out they are not all created equally. They are usually a fund of funds that reallocate on a regular basis going from more aggressive to less aggressive as you approach the target date. The net result of that tends to be a lot of transaction fees within the portfolio that pushes up the management fee. Often times, a great middle of the road choice is a solid index fund, something that tracks the S&P500 should get you decent returns with minimal expenses.
Also, the people at Vanguard, Schwab, Fidelity, where ever you end up, are usually licensed and can help you with advice as to how to allocate your portfolio. Take their advice with a grain of salt, but its a good start.