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Investing for Retirement
Zifnab
Registered User regular
Registered User regular
I'm 23 years old, about to graduate from college, with about $15,000 in student loans and a little under $1,000 in credit card debt. I have two jobs (freelance) pending right now that should bring me in about $1400 by the end of May, on top of my current monthly income, and this will pay off my credit card debt. I feel as though I have a handle on my current debt situation and am confident that I will be able to pay it off.
That said, I recently discovered that my grandmother had given $3000 to my mother to give to me on graduation to do with what I please. My stepfather thinks I should use it for student loans, but I would rather use it to start saving for my retirement. My reasoning is that I have plenty of time to pay off the loan, a relatively small amount to pay off, and enough earning potential for it to be feasible for me to pay off the entire amount with income rather than using this gift. This means that I have $3000 that I am fully prepared to never see again, though obviously I would rather it not disappear.
After doing a good bit of research on retirement accounts, I have decided on a Roth IRA. My current job doesn't offer a 401k, and neither will my next job, and I think that with my current age and financial situation a Roth IRA has several benefits for me over a Traditional IRA.
tl;dr - $3000 gift, want to open a Roth IRA
My questions are these:
-How do I find somewhere to open this account? I have an account with National City and a savings account with ING Direct, and they both offer them. I've also heard good things about companies such as T. Rowe Price and Vanguard. There seem to be a lot of choices, and I can't really figure out the differences between them.
-How do I determine what sort of fund I want the money to go into? For example, the T. Rowe Price prospectus link takes me here, and I'm not really sure how to boil that all down into something I understand.
-Is there anything I need to be aware of before doing this? I want to be as fully informed as possible before I jump into this, but it can be hard to learn everything when you're coming from nothing.
That said, I recently discovered that my grandmother had given $3000 to my mother to give to me on graduation to do with what I please. My stepfather thinks I should use it for student loans, but I would rather use it to start saving for my retirement. My reasoning is that I have plenty of time to pay off the loan, a relatively small amount to pay off, and enough earning potential for it to be feasible for me to pay off the entire amount with income rather than using this gift. This means that I have $3000 that I am fully prepared to never see again, though obviously I would rather it not disappear.
After doing a good bit of research on retirement accounts, I have decided on a Roth IRA. My current job doesn't offer a 401k, and neither will my next job, and I think that with my current age and financial situation a Roth IRA has several benefits for me over a Traditional IRA.
tl;dr - $3000 gift, want to open a Roth IRA
My questions are these:
-How do I find somewhere to open this account? I have an account with National City and a savings account with ING Direct, and they both offer them. I've also heard good things about companies such as T. Rowe Price and Vanguard. There seem to be a lot of choices, and I can't really figure out the differences between them.
-How do I determine what sort of fund I want the money to go into? For example, the T. Rowe Price prospectus link takes me here, and I'm not really sure how to boil that all down into something I understand.
-Is there anything I need to be aware of before doing this? I want to be as fully informed as possible before I jump into this, but it can be hard to learn everything when you're coming from nothing.
Zifnab on
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For your first question, it's really just a matter of finding a good investment representative that you trust. I wouldn't worry as much about what company you go with, but instead about the individual representative. Ask around, find out what you can about different reps as much as possible. You want to find someone who is going to be honest and upfront with you, and one that doesn't mind that you aren't investing much at this point. Generally, these guys are the ones who will give you advice on what specific mutual funds you should invest in, so you want to find someone who has your interests in mind, not theirs.
For your second question, I can only answer very generally. Again, an investment rep will be able to walk you through several different funds and give advice based on what your goals are. In general though, if you're mainly investing for retirement, you will want to lean toward a more aggressive strategy. Growth/Income and Growth funds supplemented with some straight Income funds should be a generally good strategy, but you'll be able to figure that out specifically with a rep. Considering how young you are, though, investing aggressively shouldn't be as big of a risk since you have plenty of time for your funds to fluctuate before you retire. We're using Lord Abbot, and we've been pretty satisfied so far.
But yeah, in general, the best advice I can give is to find a good investment representative. They will be able to answer your questions in detail and take the time to go over your long term goals.
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Shogun Streams Vidya
Some funds have custodial fees and other things. You've got enough money to not be hit by the major ones, but not enough where they will work your money gratis. You have to factor that into the interest rate differences.
So you've got your fund all picked out, checked out the return on investment over the last 3-4 years, and you've examined the prospectus. What's the interest rate on your student loans?
If your student loans are at 6%, and the best RothIRA fund you can find is returning 7% after fees, that's a net gain of 1%. That's still a gain, mind, so it's not like it's bad. Doesn't cover inflation, though.
Now, check this out. A lot of employers offer retirement benefits to their employees. Often you need to be with the company for a year or two before you can take advantage of them, but once you're there, let's see how that stacks up. You could gain 1% on the $3000 for a few years, or you could drastically reduce the student loan amount. Let's say you get a job with an employer that offers 10% matching at a max of 3% of your salary. You put in $1000 a year, they add $100 a year. You also earn interest on this amount, at 8%. Even if it's 2 years after you open your IRA with the $3k, you've gone from a net gain of 1% (or $30) to a net gain of 18.8%
Now, you say, "but I can do that no matter what -- shouldn't I be earning the 1% until then, so I have even more money?" That would be true, if you can afford to have the entire amount taken out of your paycheck.
So it's really a tough call. If you pay off your student loan ASAP, you can pay less interest over the life of the loan. Let's say you're charged 6%. If you pay it off paying the minimum payment, they're usually rated for 10 years. At the end of the 10 years, you will have paid approximately $19983, or about $5000 in interest. However, if you start the loan at $12k, you will only pay about $4000 in interest, even if you still only pay a minimum over the 10 years.
Now, this is all just raw number junk without a frame of reference as to how your finances are, and you don't have to share it. Suffice to say, you should do what makes the most sense NOW based on your financial situation, not on what could be the case in 40 years when/if you retire. Why? Because if you're living paycheck to paycheck, you should work to reduce your bills immediately. That means you take the lump sum and pay off your student loans as quickly as possible. However, if you've got a good job where you can make a higher payment on your student loans anyway AND also contribute to the Roth IRA, then it doesn't matter, and you should put the $3k in your Roth in order to supplement the money you're already adding.
Finally, saving for retirement is essentially worthless if you regularly carry credit card debt (unless you're a moneybags and like the idea of throwing money away). You will NOT earn more money in a roth or any other retirement fund compared to the amount of interest that credit card companies charge.
If you are unable to keep yourself out of credit card debt, then you should use the money as your "rainy day" fund so you are able to actually save. You should have about 3-4 months of money saved up in highly liquid funds (ING account works here) so that you don't have to go into any daily debt. Daily debt, as I call it, is debt you acquire simply by doing stuff day to day. It's not cars, houses, or student loans. My friends and family tend to run investing stuff by me, not because I'm an ace at it or have a lot saved up, but because I've had a credit card for almost 10 years and I've never paid one penny to credit card interest. I'm not trying to berate you, as I don't know what caused you to carry the credit card debt (like, could be school books, those things aren't exactly cheap), but you need to keep that in mind -- invest, but be able to afford it. If you can't afford it, either change your lifestyle or wait.
That doesn't mean you should go hogwild with your cash and not learn good saving habits, but if you put any money in an IRA and then, say in a year, you need it because of credit card debt and missed bills, you will lose all of your interest and then some by withdrawing the money.
As for the "who to go with," ING is good if you're doing it independently. The other places tend to be a little expensive if you're not going in as part of a job, as they have higher custodial fees. You also need to get in the habit of adding to it. Doesn't have to be huge chunks, but they work best when you add a little bit regularly, as that's a larger infusion than simply letting interesting work over time. After all, you've also got inflation working against you. edited to add: Oh, forgot to say, you don't need to worry too much about the company that you chose, as you can change them. They usually will not charge a fee simply for switching to them, and people will move their funds around all the time, either because of a job change or they simply want to change their return.
As far as choosing which company to go with, go with the one that will take the least amount of your money. The prospectus for each fund with tell you the operating fees, so find the lowest and go with them. Although if you really aren't comfortable with doing this on your own, you could invest with whoever lets you talk to a person face to face.
Also, while the IRA is a good structure, you might want to do some medium term investing with maybe a third of what you're planning with - it's OK to have some semiliquid stuff, like mutual funds, that you could tap for say, a major home purchase down the road.
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A Roth IRA can be tapped penalty free one time to use as a down payment on a first home.
Shogun Streams Vidya
You've got a handel on your debts (so you say), so I'd deffinately go the rrsp route.
edit> you can cash them out later if it turns out your debts are going to kill you. Life or death only though! Don't be ruined by temptation!
Wow this I did not know. I've been sitting on a big chunk of change unsure of what to do earning a crappy 4%. Time to increase my ROTH IRA. The only hesitation I had was if I decided to move out of my parents, I wanted to be able to afford the downpayment on a house.
Also keep in mind that once you get a real job, and make real money, you may be making too much to invest in a Roth IRA, so doing it now could be a limited opportunity. Though, what is the interest rate on those student loans?
Hmm. I know there's a $4000 per year limit on contributions to a Roth, but you're completely barred form contributing to one beyond a certain income level?
And also, do you really need to be making a greater % return on a Roth, compared to the loan interest to be worth it? I realize that inflation will be a problem, but you avoid income tax on the Roth earnings, but you're paying loan interest with taxed money. I'm not sure if I'm thinking of it the right way.
Edit: Also, in regards to the example of the ING accounts, just how highly liquid are we talking? My bank's savings account gives a terribly measly 1%.
If you have any credit unions in your area, you can open a savings account and get much better intrest rates - 3-5% easy. Also, a money market account is a good way to earn some decent intrest while maintaining some kind of liquidity should crap hit the fan. Shop around, and find ones that don't penalize you for emergency withdrawls and such though.
And yeah, your Roth IRA contributions begin to be limited at a certain income, and are progressively reduced until you're totally ineligible at a certain income level.
Actually, to follow that up with helpful advice, if you DO land a job where you're earning that much, you need to talk to an actual investment guy at an actual investment company. Not "person who leaves their card at a restaurant," but like a rep of Vanguard or a local regional/national bank that handles investing.
I have found that the investment people are generally unhelpful if you have a small amount to invest, or are interested in a lump sum and then no longer doing anything with it.
I'd recommend the revised edition with commentary by Jason Zweig.