Help me start saving for retirement (U.S.)
February 20, 2014 8:08 AM   Subscribe

I would like to finally start saving for retirement! I'm thinking a Roth IRA is the way to go (unless you think otherwise and can tell me why), but I am a little confused/overwhelmed with how to proceed. A few snowflakes inside.

I am in my late 20s. I don't have a tremendous amount of savings, so I'm not sure I can swing a large lump sum to open an account--although I could be persuaded if necessary--but I am making a regular salary that would allow me to make regular smaller payments into some kind of retirement fund, at least for a little while. I also have a lot of student debt, and although I am starting to get a handle on managing that, making even a significant dent in it before thinking about retirement savings is not going to be a feasible option for me.

I don't know anything about investing, and frankly my preliminary investigation into the issue makes my head swim. I would like something that I do not need to worry about or actively manage, but something that is a good deal, and I am (maybe irrationally?) wary of trusting people whose job it is to sell me this plan or that. I would prefer something that does not charge me fees to add money to it every few months. I hope to someday have a job that will have a built in retirement account (like a 401k) so I am also interested in hearing about how a separate IRA account can be managed alongside an employer-based plan, or merged with, or whatever makes the most sense.

If y'all could break down for me, in the simple possible terms, how to best proceed, I would appreciate it. I am willing to talk to a financial advisor, but would prefer to just handle it myself if possible. Any advice on selecting an account, what factors I may want to consider in determining how aggressive my retirement investment should be, what I should think about in determining the size of my contributions to it, and what to do about an IRA if I do end up eventually getting a job with a built in 401k would be greatly appreciated. Is this something that I could trust my local credit union to be straightforward about? If I did go through a local credit union but ended up moving later, would that cause complications?

I have searched previous questions, and I have found them rather overwhelming and/or inapplicable, so any advice you can give would be much appreciated. Thank you so very much.
posted by likeatoaster to Work & Money (14 answers total) 40 users marked this as a favorite
Best answer: Since you don't have a 401(k), a Roth IRA is a good option for now. I use Vanguard because it is pretty low in fees, and the funds are pretty solid. If you're just starting out, you can always just use a Target fund (based on the year you target for retiring), and Vanguard or whatever firm adjusts the funds you are investing in based on how close you are to retirement. Because you're pretty young, the fund would be more aggressive for you.

What we do for our Roth is we divide the maximum you can put in each year by 12, and put that in every month. The maximum for 2013 was $5500, and I don't think that it changed this year. This way we don't have to come up with $5500 (or $11000 for the two of us) all at once, it's spread out and more manageable. Obviously the more you can do the better, but if your student loan interest is high, you'll have to just figure out what amount works for you.
posted by getawaysticks at 8:16 AM on February 20, 2014 [3 favorites]

I was going to say pretty much the exact same thing as getawaysticks.

With Vanguard, it's easy to setup a regular transfer from a checking account, so you don't even need to take action monthly. It's probably the case for a bunch of other places too, but I went with Vanguard to keep my fees to a minimum.
posted by advicepig at 8:20 AM on February 20, 2014 [1 favorite]

Best answer: Start with some reading. Personal Finance for Dummies or The Bogleheads' Guide to Investing would be good places to start. Having a basic understanding of what stocks are, what bonds are, different types of management (passive vs. active), and the impact of fees is going to make other decisions easier.

You sound like a good candidate for a Target Retirement Fund. These are basically all-in-one, set-it-and-forget-it funds. They rebalance automatically so you only have to decide once how much risk you want to take, and they automatically get less risky as you get closer to retirement. A 2050 fund could be the right fund if you want to retire in around 35 years, but make sure you are comfortable with the risk it entails. Pick a later date if you want something a little riskier, pick an earlier date if you want something a little less risky.

If you invest with a mutual company like Vanguard or Fidelity you won't be charged any fees when you add to it. Wherever you invest, consider the fund's ER (expense ratio). Vanguard's 2050 fund as an ER of .18. That means for every $1000 you invest you'll be paying $1.80/year in expenses. Fidelity's 2050 fund (called the Freedom 2050 fund) has an ER of .82 ($8.20/yer per $1000). It's very easy to open up an IRA with either of them. Vanguard has an initial minimum investment of $1000, but once it's open you can do automated, smaller transfers from your checking account.

Vanguard's IRAs have no fees (beyond the expense ratio) if you sign up for electronic (rather than paper) delivery of your statements and other documents.

(If you're wondering why people like Vanguard so much, it is because they are run not-for-profit, in a similar way to the way a credit union is run. Because of this you end up paying much fewer fees than someone who is investing with a company with a profit motive. I've been investing with Vanguard for about 7 years, and in that time, I've only seen expenses go down.)
posted by matcha action at 8:25 AM on February 20, 2014 [6 favorites]

The Bogelheads Guide to Retirement Planning is an excellent introductory look at retirement planning, types of accounts, and types of investments. If you read it, it will get you up to speed on the basics you need to know.

If I were in your situation, I would start by saving $1,000 to open either a Traditional or a ROTH IRA at Vanguard. (Either would be a good option. I think the worst-case scenario here is putting off opening an account because you can't decide which one is "best".) Once you have the account open, move the money into the Target Retirement fund with the date of your expected retirement. (It looks like the Target Retirement funds have a $1000 minimum investment, and no purchase fees, so you could move your $1,000 right into that fund.) The Target Retirement fund is a set-and-forget option. It will automatically adjust your asset allocations for you over time.

Start with $100 per month or $50 per month or really, anything you can afford right now. Get the habit of saving established. You can increase your contributions as you grow in your career.

Don't worry about the 401(k) for now -- cross that bridge when you get there. Typically you would keep your 401(k) and IRA(s) separate. When you leave the company where you have a 401(k) you can roll the money into a traditional IRA. But that's way down the road. Don't worry about that for now.

Personally, I'm not with Vanguard and I have a much more hands-on approach. But I got there by starting with small transactions and learning over time.
posted by pie ninja at 8:26 AM on February 20, 2014

The question of Roth IRA or traditional IRA is: do you need a tax break now (traditional) or when you retire (Roth)?

If you're pretty sure you're going to be wealthy in retirement, with lots of investments that have gone up in value over the years, go with a Roth.

As for me, while I'm doing my best to save for a comfortable retirement, I really don't know what's going to happen between now and then. I've pretty much just got whatever I save now plus whatever Social Security will be available then. So I would rather get the tax break now. That allows me to shovel more into the retirement fund now.
posted by Bentobox Humperdinck at 8:26 AM on February 20, 2014 [1 favorite]

Good for you!

This is pretty easy. Vanguard is generally considered to be one of the best providers because they have decent options and low fees.

- Create a Roth IRA account with Vanguard online. Local credit unions probably do not have competitive fees and options.
- Purchase the target date fund that's appropriate for when you want to retire (maybe 2050 for you). I believe there is a $1000 minimum purchase for this but after that you can make whatever monthly contribution you can afford, up to the maximum allowed.
- Make sure you choose e-delivery of all documents from them to avoid fees.

The size of your contributions should, since you don't have a 401(k), be as much as you can afford to save. If you get a 401(k) in the future, the general advice is to max out as much employer match as possible with the 401(k) and then concentrate on IRA contributions up to the maximum. For example, if your employer matches 401(k) contributions up to 3% of your salary, you want to make sure that 3% of your salary is going into the 401(k) so you get that free matching money.

I would keep the IRA and (potential) 401(k) separate and continue to manage the IRA on your own. The reason that it is usually advised to prioritize IRAs over 401(k)s is that with the IRA you are able to choose better low-fee options (Vanguard) and have more freedom with what you can do with the money in general. 401(k)s often have limited choice of funds and various other restrictions.
posted by ghharr at 8:27 AM on February 20, 2014 [1 favorite]

Yes, the canonical advice is to open an account with Vanguard because they offer very low fees. Here's their getting-started page. You do have to put in the minimum amount to opne it (generally $1,000 to $3,000, depending on which fund you're buying into), but after that it is easy to set up automatic contributions each month.

You don't have to worry about the 401(k) for now. It's easy to have both an IRA and a 401(k). Having an IRA won't interfere with opening a 401(k) later. The only thing that makes it slightly complicated is having to look at both accounts when you are making sure that your mix of stocks and bonds is what you want it to be. But honestly because you are just starting out don't worry too much about the mix. The most important thing is that you are contributing regularly to your retirement accounts.

You can totally learn just the basics and set up an automatic system and you will be doing great. Pie ninja mentions the Bogleheads investing book, and I'll add that the Boglehead forums and wiki are both full of helpful information, if you want to learn more.
posted by aka burlap at 8:32 AM on February 20, 2014

Best answer: I use Vanguard for my Roth IRA as well (mainly because of inertia -- they also manage my company's 401k, but they also seemed decent fee-wise the last time I compared them to others such as Charles Schwab, or ShareBuilder).

I am not a financial advisor, but I like Roth IRAs for beginning investment because of the flexibility inherent in being able to withdraw your principal at any time. It's not risk-free (because it is an investment), but knowing that if you invest a few grand over the next few years but then decide that your goals change and you want to buy a house/go to grad school or whatever made the decision much easier for me.

If y'all could break down for me, in the simple possible terms, how to best proceed
  • Verify that you are under the income limits for contributing to a Roth IRA. If you are above them, then 1.) obviously a Roth isn't for you, and 2.) you really should be looking into a fee-based financial advisor to help you manage your money.
  • Decide how much you have available right now to put into a Roth IRA (even if its like $50), put all of that in a checking/savings account that you want withdrawals taken from.
  • Go to, click on Personal Investors, and then click on open an account.
  • Give them whatever details they ask for.
  • When asked which funds you want to invest in, choose a stock index fund and a bond index fund. A good mix is something like 70% into stocks and 30% into bonds.
    • This ratio varies based on a number of factors and Vanguard has tools that can help you figure out what your personal risk tolerance level is like.
    • Index funds are good because they generally have the lowest amount of fees. You are also diversified-by-default, because the indexes hold a number of stocks/bonds and are tied to numbers you can see every day like the S&P 500.
  • Decide how much you can afford to put away every month. Ideally, if you are under the limit that would be $5,500/12 = $458(ish). That amount is not reasonable for a vast number of folks, so choose what works for your budget.
    • Even $10/month is great! ($100 is better)
  • Set up an automatic withdrawal from the checking account that you designated.
  • If you are contributing less than the max, consider logging in every month or two to contribute more if you have extra funds available.
  • Let your savings grow for 6 months. Don't touch, don't fiddle (if you can, avoid watching the balance).

    posted by sparklemotion at 8:35 AM on February 20, 2014 [2 favorites]

    Here's something I hadn't thought of when I put a couple thousand in a Roth IRA when I was 20: Who was I investing my money in?

    Over the years, I watched my money rise and fall in tandem with large markets that I did not support in other ways. I recycle, I don't drive a car... why was my savings supporting these businesses.

    So my advice to you is to research carefully who you're investing your money in. Do the businesses match the values you hold in day-to-day life?
    posted by aniola at 8:54 AM on February 20, 2014

    Here's something I hadn't thought of when I put a couple thousand in a Roth IRA when I was 20: Who was I investing my money in?

    This represents a fundamental misunderstanding of the market. Once a company has passed its IPO, companies do not sell stock to traders. Hence, past the IPO, trading a stock does not make any money for the company.
    posted by saeculorum at 10:23 AM on February 20, 2014 [1 favorite]

    I agree with the recommendations above (Vanguard, Bogleheads - not a coincidence that they are related) but would differ from Sparklemotion's (excellent) comment in one particular. As getawaysticks said right up top, to start with, you should just invest in a Target Retirement Date fund.

    Why? Because you want an allocation that is appropriate for your risk appetite, and your investments should get more conservative as you approach retirement. That requires annual (at least) rebalancing of your investment mix.

    For example, in 2013, the Vanguard bond index fund BND declined from 84 to 80 while the Vanguard total stock market index VTI went from 75 to 95. If you'd started with a 30-70 split, you'd end up with a 24.4-75.6 split (and a 17% net gain). But maybe you intended to get more conservative by moving further into bonds instead of getting further stock-weighted.

    Instead of worrying about this stuff, especially when you're starting out, I think you should say, "I'd like to retire in 2060" (or whatever) and let the Vanguard money managers handle the rebalancing issues.

    When you're ready to dig deeper, there's an infinite amount to occupy you - although many people have spent years doing this before coming round to the realization that playing the market is a fool's game, and they should have just stuck to index funds.

    Meanwhile, if this isn't your life's work, open a Vanguard account, pick the right Target Retirement Date fund, set up automatic investments, and go outside to enjoy the sunshine.
    posted by RedOrGreen at 12:12 PM on February 20, 2014 [2 favorites]

    For the record, the only reason that I didn't recommend a Target Date Fund is that the last time I looked into them (and I am a very lazy investor so it has been a while) there fees were pretty high for what they claimed to be able to do. I'm not adverse to paying management fees in general, but I think that if you are going to pay them, you should know more about what you're actually paying for.

    So, I like the idea of TDFs, but I feel like you need to put some research into how they are actually going to manage your money before you decide to go with one.

    So for someone who wants to start simple, while doing a minimum amount of research, I think index funds are better. You can manage your own stocks:bonds ratio with a yearly rebalancing and using a formula like 1% in bonds for every year of age or whatever feels right to you.

    And remember, OP, nothing stops you from switching from one strategy to another in the future. Just try to keep major rebalancings to once or twice a year at most.
    posted by sparklemotion at 12:29 PM on February 20, 2014

    From Vanguard:
    Vanguard Target Retirement Funds average expense ratio: 0.17%.
    Industry average expense ratio for comparable target-date funds: 0.64%.

    (That means that on these Target Date funds, on average 0.17% of your money gets paid to Vanguard money managers each year: $170 on a $100,000 portfolio. Or you could DIY, of course.)
    posted by RedOrGreen at 3:04 PM on February 20, 2014 [1 favorite]

    All things being equal (I.e. Tax rates and growth) - a Roth is identical to a 401k.

    Assume a 10% tax rate (now and retirement) and that you triple your investment.

    Roth - $100 investment. Deduct 10% of tax you pay now ($90 to invest) and triple it - $270 at retirement.

    401k - no taxes now. Triple it ($300). Pay taxes ($30). $270 at retirement.

    This blew my mind when someone pointed it out. I always assumed a Roth was better. Tax brackets in 30 years are pretty unpredictable though.

    A good strategy is to have both to hedge your bets.
    posted by dig_duggler at 7:12 PM on April 29, 2014

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