Which IRA/broker/funds to get when facing retirement in 20 years?

November 3, 2006 5:41 PM

A friend in her mid-40s is, for various reasons, only now getting a belated start on planning for retirement. Help me point her in the right direction!

I've read several of the previous threads on IRAs, and they have been helpful, but I haven’t come across anything that specifically addresses this situation (i.e., starting late, not having any investment experience, and not having much to invest). I have a 401k through work with funds that I’ve "set" to match my own risk profile, but don’t have much experience beyond that (though I guess I should consider an IRA too). Questions:

- Roth vs. Traditional? I keep hearing that the Roth is better in terms of income potential, with the tradeoff being that you can’t take the tax deduction when you put money in. So I'm assuming a Roth is the one to get; however, if there is a good argument for opening a traditional IRA (or both), I’m all ears.

- What are some good options for an inexperienced investor with not a lot of income? I’ve heard good things about the Vanguard Target Retirement Funds, for example, but she doesn’t have the required $3000 for the initial investment. Are there similar options without the initial lump sum that will adjust automatically for her risk situation over the next 20 years?

Thanks for any help.

posted by fizzyliftingdrink to work & money (13 comments total)

I don't know about Vanguard specifically, but lots of funds will waive or drastically lower the initial investment requirement if you set up an automatic investment plan. Maybe this is an option? AIPs are a great way to force savings, especially if you can get them automagically deducted from the paycheck before your friend ever sees the money.
posted by bink at 6:28 PM on November 3, 2006

This fee disclosure doesn't mention a $3k minimum contribution, though keeping a balance under $5000 will incur one or more fees. If I recall correctly, Vanguard only requires $100 min per transaction. Have her call to check how little she'd need to start. She may already have enough.

The Target index funds are good for keeping fees low and avoiding having to re-balance periodically as she approaches retirement. The tradeoff is that as an index, earnings are only going to be the avg of the market. So yes, pretty much designed for "inexperienced investor", as long as the investor doesn't harbor unrealistic expectations of earnings.
posted by nakedcodemonkey at 6:34 PM on November 3, 2006

Oops, here's the link to that fee disclosure.
posted by nakedcodemonkey at 6:35 PM on November 3, 2006

I'll be honest--i didn't read exactly what you are asking but if it involves money, i suggest this site: getrichslowly.com

Love reading it and it has great topics of planning for retirement, etc
posted by uncballzer at 7:05 PM on November 3, 2006

not sure but uncballzer might be thinking of http://www.getrichslowly.org/blog/
posted by prettyboyfloyd at 7:18 PM on November 3, 2006

Try the book Start Late, Finish Rich by David Bach. I believe it addresses exactly these sorts of questions. Most public libraries should have a copy.
posted by jdroth at 8:20 PM on November 3, 2006

IANAFP, but everything I've read suggests that the Roth most benefits the young (read:20-30s, two or three decades away from retirement). Depending on where her income level is, she may be better off with the tax break.

Again, I'm no expert on this, but it seems like every article and book on this topic emphasizes (a) taking advantage of an employer's 401(k) match, if there is one; (b) maximizing any tax-advantaged accounts, which would mean 401(k)s and traditional IRAs; and (c) keeping debt to a minimum, eliminating it entirely if possible.

As far as good investment options for a new investor: They are legion. I've had good experience with T. Rowe Price, and they waive all minimums if you commit to putting $50 a month into your plan.

Can you give any more details on your friend's income bracket, debt load, etc.?
posted by jbickers at 9:50 PM on November 3, 2006

more details (as far as I know them):

There is no 401(k) option -- friend works in the service industry and employer does not offer it (employer doesn't offer health insurance either, so she pays for an individual plan herself). I'm estimating her income to be in the mid-30s. She has some debt but she's not drowning in it -- I'm aware of a couple of thousand in credit card debt, which she's working on eliminating; her car is old and long since paid for, and she rents her apt.

Thanks for comments so far. Keep 'em coming!
posted by fizzyliftingdrink at 10:46 PM on November 3, 2006

There is no 401(k) option ... income to be in the mid-30s

Your friend really needs to be contributing a lot of money to a retirement account since she started so late.

However, since she doesn't have access to a 401(k), she won't be able to put much into a tax-deferred account (only $4000 each year into an IRA instead of $14,000 into a 401(k)).

Therefore I think she should be looking at the following:

1) a Roth IRA -- since you contribute after-tax dollars but never pay tax on the earnings, your $4000 maximum is actually more like $5000 contributed to a regular IRA, except the limit on a regular IRA is $4000.

2) She should save and invest as much as she can beyond the IRA contribution into a taxable account. A tax-advantaged account would be better, but this is better than nothing. She's going to pay taxes on the money she puts in and then capital gains when she sells.

Unfortunately, if your estimate of her earnings is correct, I think she's probably going to have difficulty even maxing out the Roth IRA. That probably won't be enough for retirement since she's starting so late. So my final piece of advice would be:

4) Aggressively look for a new job that pays much more and offers a 401(k) plan.
posted by kindall at 7:24 AM on November 4, 2006

"Three, sir!"
posted by kindall at 7:24 AM on November 4, 2006

As said before, she should max out (currently $4000) an IRA of some kind every year. Once she turns 50, she can take advantage of the "catch-up" provisions to stash more (currently $5000) away.

Yes, date targeted funds are an excellent way for those without the knowledge or interest in actively controlling their investments. Vanguard, Fidelity and T. Rowe Price are all good providers of these funds.

Some suggested resources:
Morningstar's Retirement Center (free reg req'd, but it's worth it)
SmartMoney's Retirement section
MSN Money has good stuff too

Don't let her be discouraged if she uses a retirement calculator or reads an article and discovers that she needs what seems like an impossibly high savings target. The journey of a thousand miles, etc. Plus, when she retires will make a big difference; if she can work a few extra years, that will help a lot. But she needs to start saving ASAP.
posted by pmurray63 at 9:40 AM on November 4, 2006

A more specific answer to your question:

TRP and Fidelity have initial minimums of $2500, slightly lower than Vanguard's $3000.

If she can't make those amounts, she could start one anywhere with a lower minimum (like a bank) and then transfer it once she's built up the necessary $2500 or $3000. Don't take the cash and do it yourself -- the IRS will wonder if you kept some/all of the money and want a cut. Transfer it.

She does have until April 15, 2007 to make her 2006 IRA contribution ... so we're talking roughly six months, not two, to come up with the initial amount.
posted by pmurray63 at 9:53 AM on November 4, 2006

Actually, the Fidelity minimum of $2500 is waived if you commit to a defined contribution of $200 per month.

If I were your friend and wanted to just get started without making any drastic mistakes, I'd set that up to dump the monthly $200 into the Fidelity Freedom 2030 account and forget about it for the next 24 years.

Exchanges are free among Fidelity funds as well as among several thousand in-network funds from other companies, so at such time as your friend decided she wanted to be more involved (if any), she would have lots of options.

I'm starting to feel like a Fidelity shill around here. I have no affiliation other than being a happy customer; I wish I'd gotten started with Fidelity years ago.
posted by ikkyu2 at 1:03 AM on November 6, 2006