I think many people who are just starting to work for the first time have questions about how to save for retirement. There are about a million different ways, and you can spend a lot of time researching what to do with your retirement money. For people just starting out who don't want to put a lot of time and effort into, there are some simple things you can do.
Option A: Go with the company plan. This is good especially if your company matches funds. Example: you put in 6% of your paycheck toward retirement, the company matches that, and you have doubled your retirement savings with no extra work. It can almost be considered a pay raise, and you never even miss the money because it's taken out before you get the paycheck. Things to consider: Don't put all your money in the company stock. If things go poorly, you could have no savings(think Enron). Do put your money in a broad market index fund. This will give you the best returns over time while minimizing risk.
Option B: Go to Vanguard.com and setup an Roth IRA with a target retirement fund. This is also a good option if you have already met your companies matching contribution. When you are setting it up choose the reinvest dividends option, and then setup automatic monthly withdrawals from your checking account. You can even choose the "maximize IRA contributions" option to ensure you make the most of it. If you're like me, the target retirement date is about the year 2045. The hardest part is getting your foot in the door. You need $3000 dollars to buy into the fund. After that you can contribute as little as $100 dollars a month with no fees for contributing more money. Even sharebuilder.com charges $4 a transaction, which is a 4% hit on a $100 investment.
Q: Why Vanguard?
A: They have a quality product and the lowest fees in the mutual fund industry. There are many other good mutual fund companies out there, but Vanguard delivers all around. The key to building wealth is minimizing fees that you pay for other people to handle your money. Over 40 years of steady investing, everything else averages out.
Q:Why a Target Retirement fund?
A: Because you don't have to worry about where your money is invested as you get older. It is automatically readjusted so that as you get closer to retirement, more money is moved out of risky investments like stocks, and into guaranteed investments like bonds. It's the only fund you every need.
Q: Why a Roth IRA?
A: Everybody should have an IRA account, even if you have a company retirement plan. Anybody who earns income can open one. In fact, you can have multiple IRA's. The only limit is how much money you are allowed to put in each year. This year's limit is $5000 for individuals(that's combined total for all IRA's). You can put any kind of investment you want in an IRA. A Roth IRA is nice because while you pay taxes on the money you contribute now, you don't pay on earnings or withdrawals after you retire.
These are the simplest options. There are many other interesting ways to invest, but these require the least amount of trouble if you are someone who wants a good retirement, but doesn't want to work for it. In a later post I'll look at a way to get the absolute minimum in fees on a retirement account(it's a little more work, so I didn't include it here)
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