Help with IRAs

[princesswindsor1]

I read a post earlier about IRAs but I am new to this whole thing so I didn't really understand some of the answers.

I am 25 (almost 26) and wanting to open a Roth IRA. My current job is a start up company w/ out 401k so I need to start saving on my own! I think I want to usa Vangaurd, maybe the Target 2035 fund, but I am not sure. I am interested in long term and less risk since I don't have much $$ to spare and don't want to watch my money go up and down drastically. I also want to keep it simple if possible.

any helpful info will be appreciated!


thanks!

[noppenbd]

If you want simple, Vanguard Target funds are about the simplest you can get. If Vanguard's minimums are too high you can also do a similar strategy with T Rowe Price with as little as $50 a month.

The target funds are "baskets" of index funds, which allow you diversify your portfolio by buying a single fund. In addition, the mix of the funds is automatically adjusted as the target date nears to make them more and more conservative (larger portion allocated to bonds and less to stocks).

However, they are not without risk, so it is important you understand what kind of risks you are taking and that you are comfortable with them. Diversification does not prevent a fund from going down, and the further out your target date, the more swing will occur.

The key thing to remember is that you are quite young and have a long time to make up any drops that occur in the short term. In fact drops that occur now are helpful to you because they reduce the price of the funds you are purchasing and provide for more room for prices to move up in the future. Dollar cost averaging (DCAing) is a good way to make sure you take advantage of drops in the market, by continuing to purchase shares on a regular basis. Vanguard and most mutual fund companies will allow you to set up automatic withdrawals from a bank account so you get into a savings habit. DCAing means that a constant dollar amount is used to purchase shares. When share prices go down you will end up buying more shares, and when they go up you will end up buying less, letting you take advantage of dips and drops in the market.

Start a DCA program now and as your salary increases you will be able to raise the amount you put in your Roth until you reach the max (currently $5000 a year). The key is not to fret about how much you are putting in now, but rather start a savings habit that is automatic and consistent. A good goal to shoot for is saving 15% of your gross salary.

You should read up more on mutual funds and investing through the LA Times website:
Money Library - Los Angeles Times

The Investing 101 section talks a lot about risk and diversification.

[princesswindsor1]

Thanks for the great info. I am glad I found these forums!

[responduser]

I read a post earlier about IRAs but I am new to this whole thing so I didn't really understand some of the answers.

I am 25 (almost 26) and wanting to open a Roth IRA. My current job is a start up company w/ out 401k so I need to start saving on my own! I think I want to usa Vangaurd, maybe the Target 2035 fund, but I am not sure. I am interested in long term and less risk since I don't have much $$ to spare and don't want to watch my money go up and down drastically. I also want to keep it simple if possible.

any helpful info will be appreciated!


thanks!

Seek help from a finance professional. After all this is for your financial future.

[humandraydel]

Seek help from a finance professional. After all this is for your financial future.

I disagree. A "finance professional" won't tell you anything you can't learn on your own. Not to mention that many "finance professionals" have their own finances in mind when they make recommendations.

A Target Retirement fund at Vanguard is an excellent idea. It really is that easy - set it and forget it!

[jIM_Ohio]

I read a post earlier about IRAs but I am new to this whole thing so I didn't really understand some of the answers.

I am 25 (almost 26) and wanting to open a Roth IRA. My current job is a start up company w/ out 401k so I need to start saving on my own! I think I want to usa Vangaurd, maybe the Target 2035 fund, but I am not sure. I am interested in long term and less risk since I don't have much $$ to spare and don't want to watch my money go up and down drastically. I also want to keep it simple if possible.

any helpful info will be appreciated!


thanks!

Do you make more than $33k (single) or $66k (married)? If so, and you do not have a 401k at work, I might suggest a deductable IRA is a better option based on current tax bracket. Contribute $5k, get 25% back on tax return ($1250).

Long term, less risk is a contradicatory pair of sentences- the money which has the longest timeframe (20-30-40 years) is the money which can take the most risk (because the length of time in itself reduces risks).

You put in 5k now and over the next year or two it might drop to $4500 (10% drop) or even $4000 (20% drop). Based on history, you worst case might be dropping to $3000 (40% drop) in a year.

But within 7 years that 5k will be there because over time, the market goes up (if you did not believe this, then you would not be investing in the market to begin with), and then within 15 years, more than likely the money doubled once ($10k) and probably twice (20k)- so within 15 years, it is likely the money invested (5k) has turned into 20k, and even the worst case (40%) drop above still leaves you with 16k, which is still 3X the initial 5k investment.

My advice would be to put the initial money in with a moderate-almost aggressive risk profile, because time will reduce the volatility relative to the initial 5k investment.

In 15 years, more than likely you will modify your risk profile so the 20k balance may not drop 40% anymore... but with time on your side I would not concern yourself with the fluctuations of the market until you are ready to start thinking about withdrawing the money (2035 is 27 years away). In 27 years, a good investor will probably have money double 4 times for sure (5k-10k-20k-40k) and maybe 5 times if you are aggressive enough (5k becomes 80k).

[princesswindsor1]

Target 2040 or 2045?

Let's say I do decide to use the Target funds with Vangaurd, if I am 26 and want to retire at age 60 would it be better to use the 2040 or 2045?

I guess what i am asking is, if I use say 2040 fund and in 2040 I am only 58 will I have to withdrawal my money then or will I be able to wait until 59 1/2, or would it just be better to use 2045? And if AI use 2045 will I have to wait until 2045 to get my money out?

[atomicrc11]

No you won't have to wait to get your money out. I have the Vanguard Target Retirement 2045 fund myself. All the date means is how soon it will shift more towards bonds than stocks. If you plan to retire at 65 and you're 26 now, go with either a 2045 or 2050 fund. The only way you will get a penalty is if you take your money out before you're 59 and 1/2 years old.

On the account type, if you can afford not to get the deduction, a Roth may be best since you may never be in as low a tax bracket again. This way your money is taxed now and if in retirement you're in the 35% tax bracket, you won't need to pay that since you paid your taxes up front.

[jIM_Ohio]

If you are aggressive- go 2045
If you want less risk- go 2040

The earlier dates will reduce risk earlier in your life.

These funds work well for accumulation. Read the prospectus for what happens when the target date is reached.

For example, I think Fidelity rolls the target date funds into a "retirement income" fund.

I think T Rowe price adjusts asset allocation to be the same as their personal strategy income or retirement income funds, but does not actually merge the funds.

I thought I read Vanguard had a third strategy for 10 or 20 years after target date.

In any case, if the fund is in a 401k or IRA you could sell the whole fund (with no tax consequence) and buy another fund. For example Vanguard has managed payout funds which pay 3%-5% or 7% to you each year.

You could use the 2040 fund the sell it in 2041 to get the 3% fund
You could use the 2045 fund and sell it in 2041 to get the same 3% payout fund.

Or you could use the 7% payout fund in either case.
Or you could sell the fund in 2046 if that suits you better.