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My Old Roommate
Recently, I got a text from my old College Roommate. He was looking for some investment advice (no doubt he came to me based on my awesome previous post: How to Get Free Money and Retire a Millionnaire)
Kris: “Who do you have/who would you recommend for an IRA? I’m finally gonna start one”
Me: “Congratulations! That’s a good move. I use fidelity because they are so easy to use. They are 100% online except for a few physical stores. The other one I’ve heard good things about is Charles Schwab”
Then, he dropped the bombshell that made me realize I don’t know as much about opening retirement accounts as I should. I can tell you what to do once you have one open, but I’m a bit clueless beforehand, apparently.
Kris: “Any thoughts on Ameritrade? It looks like fidelity and Schwab both have a minimum investment that I’d rather not spare right now”
That’s fair, right? After all, you absolutely, positively should not wait until you have $2500 to invest in your future, which is what we thought Fidelity required. Hell, you shouldn’t even wait until you have the $1,000 that Charles Schwab requires. How much should you start investing with?
I’ve spoken in the past about the power of the 401(k), but now I’m going to talk about the IRA (Individual Retirement Account). Kris works in a profession where he might not be with the same company for 5 years, or even 1 year. It makes sense for him to start an IRA – 401(k)’s are only useful if you get an employer match. So, if your employer doesn’t match (give you free money) your investments in a 401(k), your best bet is an IRA.
You should start your retirement account with any amount of money you can spare. Shoot for $50.
That’s right. Start your account with $50. That’s it. Seriously.
- Next time you want to drive 300 miles. Don’t. (You will save $50 in gas)
- Next time you want a video game, rent one instead. (You will save $50 on a game)
- Next time your friends want to go out for the night, decline, or suggest a party at home (Your savings will vary based on your typical consumption of Alcohol and Food)
- Ask your parents for $50 to open a retirement account. Seriously. They will appreciate your forethought.
Who Do You Send your Money To?
- Minimum Amount to Open a Roth IRA – this is very important
- NTF Mutual Funds
- NTF ETF’s
- Stock Trade Commission
- SmartMoney Customer Service Rating
- IRA: Individual Retirement Account. This is an account you open that lets you save towards retirement. There are two types of IRA Account: Traditional, and Roth
- Traditional: You put money in your account. You don’t have to pay taxes on this money. However, when you pull money out (when you’re an old rich guy), you pay taxes on it then.
- Roth: You put money in your account. You pay taxes on the money before you put it in. However, when you pull money out (…old rich guy), you don’t pay any tax. This is what we’ll focus on.
- Mutual Fund: Your best friend. Mutual funds (and their cousins the Index Fund) invest in a whole bunch of stocks, bonds, currencies, and sometimes other investments. You buy into the fund, and you get a share of the gains, losses, and dividends. This is a great way to “diversify” your portfolio without buying 50+ individual stocks
- ETF: Exchange Traded Fund – this is like a mutual fund, but they made a stock out of a bunch of stocks. You may by one share of an ETF, but it’s kind of like investing in 2,000+ stocks at the same time. They do the work for you.
- NTF: stands for No Transaction Fee. Usually, there is a fee to invest in a mutual fund or ETF. NTF funds don’t charge this fee up front (which can be $75 or more!)
How do they Stack Up?
How to Start the Investment
Open an Account
Choose a “funding source”
Choose your base investment
The Simple Option: Buy into a Target Date Fund. You take 65 minus your age, then add that number to this year. So, for me, I would say:
Now, a quiz. If you were presented with the following options for funds, which is correct for me:
- Target Date Fund 2035
- Target Date Fund 2040
- Target Date Fund 2045
- Target Date Fund 2050
- Target Date Fund 2055
Correct Answer: Target Date Fund 2050. You could say 2055, but 2050 (earlier) is more conservative.
Try it for yourself, now!
65-YOUR AGE=YEARS UNTIL RETIREMENT
YUR + 2013 = Target Date Fund for You
Got your date? Good. Now go find the fund that is just for you.
- How to Get Free Money and Retire a Millionaire at Padorec
- Rebalancing & asset allocation: critical for investing. So why don’t you do it? by Ramit Sethi
- Retire earlier by rebalancing your 401k with the Swensen asset model by Steve Mz
- Which Investments Are Best for a Roth IRA? at Get Rich Slowly
Growing Your Investment
- $50 automatically transferred (or, ideally, direct deposited) into your account at the start of every month (right after pay day)
- $50 automatically invested into your fund of choice
A Word of Caution about Automatic Investing
When you look at your fund, look for a section called “fees”, and ensure there are no transaction fees. There will also usually be a section marked “automatic investment allowed?” and “automatic investment minimum”. Confirm that automatic investing is allowed, and that the minimum is not too high (again, it will usually be $0)
|My Favorite Fidelity Fund has a $0 minimum
for the “Automatic Account Builder”
What are you Waiting For?
|Being poor as an old man sucks|
If you wait 5 years (based on investing $50/month for 10 years, $6,000 total), then you are missing out on $50,000