Club PA 2.0 has arrived! If you'd like to access some extra PA content and help support the forums, check it out at patreon.com/ClubPA
The image size limit has been raised to 1mb! Anything larger than that should be linked to. This is a HARD limit, please do not abuse it.
Our new Indie Games subforum is now open for business in G&T. Go and check it out, you might land a code for a free game. If you're developing an indie game and want to post about it, follow these directions. If you don't, he'll break your legs! Hahaha! Seriously though.
Our rules have been updated and given their own forum. Go and look at them! They are nice, and there may be new ones that you didn't know about! Hooray for rules! Hooray for The System! Hooray for Conforming!

Newb at Saving For Retirement

evilmrhenryevilmrhenry Registered User regular
edited November 2009 in Help / Advice Forum
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.

evilmrhenry on

Posts

  • ThanatosThanatos Registered User regular
    edited November 2009
    You're almost certainly going to want a Roth IRA. Making so little, you aren't nearly as concerned about tax deductions now as you will be in forty years, and that's what you're going to get the biggest bang for your buck on.

    Thanatos on
  • SpherickSpherick Registered User regular
    edited November 2009
    I agree with Than, contact a brokerage firm (T Rowe, Raymond James, etc) and look into their Roth IRA options. An IRA is an investment and you decide which funds (the brokerage firm will send you a prospectus with all the information about each fund) your money goes into.

    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.

    Spherick on
    Some say that the Blood Angels are tainted: that they harbour a dark secret. I know this to be true. I have seen the infamous Death Company: wild-eyed and foam-mouthed berserkers who tear their enemies limb from limb, crush skulls with a single blow, snap spines and rip out inner organs. I have seen the Sanguinary Priests: the passing of blood filled chalices from lip to lip, heard their wracking lamentations of Sanguinus's death. I have watched their rituals: mighty warriors daubing their armour in the blood of their foes, heard them crying for vengeance against the enemies of the Emperor.
  • evilmrhenryevilmrhenry Registered User regular
    edited November 2009
    Spherick wrote: »
    I also suggest asking at work if they have a 401(k) plan.

    They don't.

    What sort of fees would be appropriate for an IRA?

    evilmrhenry on
  • SpherickSpherick Registered User regular
    edited November 2009
    I know T Rowe (I have a few friends who work there) charge you $10 or $15 a year if you have a balance below a certain threshold (I think its at or around $5,000)

    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.

    Spherick on
    Some say that the Blood Angels are tainted: that they harbour a dark secret. I know this to be true. I have seen the infamous Death Company: wild-eyed and foam-mouthed berserkers who tear their enemies limb from limb, crush skulls with a single blow, snap spines and rip out inner organs. I have seen the Sanguinary Priests: the passing of blood filled chalices from lip to lip, heard their wracking lamentations of Sanguinus's death. I have watched their rituals: mighty warriors daubing their armour in the blood of their foes, heard them crying for vengeance against the enemies of the Emperor.
  • ThundyrkatzThundyrkatz Registered User regular
    edited November 2009
    First off... Spherick is right on, very nicely put.

    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.

    Thundyrkatz on
  • SpherickSpherick Registered User regular
    edited November 2009
    Please note that taking money out of the IRA prior to age 59.5 for a reason that is not covered under certain exceptions is subject to a 10% penalty by the IRS. So only pull from this money if you absolutely have to.

    Spherick on
    Some say that the Blood Angels are tainted: that they harbour a dark secret. I know this to be true. I have seen the infamous Death Company: wild-eyed and foam-mouthed berserkers who tear their enemies limb from limb, crush skulls with a single blow, snap spines and rip out inner organs. I have seen the Sanguinary Priests: the passing of blood filled chalices from lip to lip, heard their wracking lamentations of Sanguinus's death. I have watched their rituals: mighty warriors daubing their armour in the blood of their foes, heard them crying for vengeance against the enemies of the Emperor.
  • evilmrhenryevilmrhenry Registered User regular
    edited November 2009
    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?

    evilmrhenry on
  • ThundyrkatzThundyrkatz Registered User regular
    edited November 2009
    Oh great! you are actually already pretty far ahead of the curve, you should be proud.

    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!

    Thundyrkatz on
  • evilmrhenryevilmrhenry Registered User regular
    edited November 2009
    Unfortunately, I don't really have any friends/family I'm able to talk to about this. (If I did, I'd be talking to them instead of PA.)

    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.

    evilmrhenry on
  • SpherickSpherick Registered User regular
    edited November 2009
    If you are being truthful about the 30k gross annual income, then you are in no way poking into the 25% bracket. With exemptions, deductions, and adjustments you should be firmly in the 15% bracket. I heavily suggest Roth over traditional. Dont assume you wont make less money in the future as I doubt you will be in the 10% bracket at retirement. If you stay in 15% your whole life, then there is something seriously wrong.

    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

    Spherick on
    Some say that the Blood Angels are tainted: that they harbour a dark secret. I know this to be true. I have seen the infamous Death Company: wild-eyed and foam-mouthed berserkers who tear their enemies limb from limb, crush skulls with a single blow, snap spines and rip out inner organs. I have seen the Sanguinary Priests: the passing of blood filled chalices from lip to lip, heard their wracking lamentations of Sanguinus's death. I have watched their rituals: mighty warriors daubing their armour in the blood of their foes, heard them crying for vengeance against the enemies of the Emperor.
  • evilmrhenryevilmrhenry Registered User regular
    edited November 2009
    Ah, forgot about all that tax crap. That adds up. Anyway, same plan as before, but Roth instead of standard. I assume I just send them checks each month.

    evilmrhenry on
  • Marty81Marty81 Registered User regular
    edited November 2009
    You can do electronic transfers too. Just give Fidelity your regular checking account's routing info and you can transfer money easily online. It takes a couple of days, but it's free and still takes less time than mailing a check.

    Marty81 on
  • DogDog Registered User, Administrator, Vanilla Staff admin
    edited November 2009
    Fidelity's 2040 target is cheaper to buy into, but Vanguard's identical fund is higher rated and not going to rape you with fees (with an extremely low expense ratio)

    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.

    Unknown User on
  • SpherickSpherick Registered User regular
    edited November 2009
    Yes, robo is right - I should have linked Investopedia as my first post. Its is awesome for learning

    Spherick on
    Some say that the Blood Angels are tainted: that they harbour a dark secret. I know this to be true. I have seen the infamous Death Company: wild-eyed and foam-mouthed berserkers who tear their enemies limb from limb, crush skulls with a single blow, snap spines and rip out inner organs. I have seen the Sanguinary Priests: the passing of blood filled chalices from lip to lip, heard their wracking lamentations of Sanguinus's death. I have watched their rituals: mighty warriors daubing their armour in the blood of their foes, heard them crying for vengeance against the enemies of the Emperor.
  • evilmrhenryevilmrhenry Registered User regular
    edited November 2009
    Vanguard does look better. I see a really low percent per year admin fee, and a couple avoidable ~$20 yearly fees. Any other fees I should watch out for?

    evilmrhenry on
  • ThundyrkatzThundyrkatz Registered User regular
    edited November 2009
    I second the ACH from your bank to make deposits. You can do this on an AdHoc basis, or you can set up an account builder feature where you send some amount every month. Typically, account builders will allow you to get in under the minimum investment level and or cause certain fees to be waived. you could do like 50 bucks a month, then supplement when you have extra cash up to the maximum per year.

    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.

    Thundyrkatz on
Sign In or Register to comment.