I'm 28 yrs old and have never started to save any funds towards retirement as of yet. I plan on being very successful financially with my business but just incase case the you know what hits the fan I need to have a nest egg for when I am older. This compounding interest really intrigues me and I want to take advantage of it

I make less than $95k per year so it seems a ROTH IRA is the perfect choice, especially since I am self employed and cannot get a 401K. When I start making more than $95K I will transfer my ROTH IRA over to a SEP IRA account, this sounds like a good plan?

I am going to contribute the max $5k per year into my ROTH IRA account in the meantime. I just called Vanguard to setup a ROTH IRA and the guy on the phone was very nice and very helpful over the phone. But I am still confused about something, he told me that usually you must open the ROTH IRA account with $3K... but since I cannot afford that right now he offered me something called "STAR" which I can start with only $1k. When I asked him what the difference between starting with $3K and 1$k he tried to explained but I still wasn't clear.

I felt like an idiot asking him to repeat it again... I hope that I'm not missing any important benefits by starting the account with $1K under the "STAR" plan rather than the standard $3K???

Can anybody clarify? Thanks.

I have a HUGE concern I forgot to mention. My main and ONLY goal with opening a ROTH IRA account was to be able to contribute $5K per year at 8% compounding interest and in 35 years I could have approx $930K (almost a million dollars) in my bank account. I calculated this with http://www.moneychimp.com/calculator/co ... ulator.htm

But how will I EVER accomplish this when this guy at Vanguard told me that some years I will have NEGATIVE interest and some years I will have 8%... then other years I might only have 3%... won't this up and down DRASTICALLY affect my goal??? I won't have anywhere near that amount of money in my account in 35 years if I'm hit with NEGATIVE interest some years??? =(

STAR is just the name of one of their many funds. They have many many funds you can choose from to put in your ROTH IRA.

You may want to pick up a few basic books on mutual funds. I can't think of any off hand, but your library has many that can give you basic knowledge you would need. Retirement savings is very important and you don't want to have to depend on others (especially just the broker) to give you basic information on how they work. Also, you could just save the $3,000 up in a good savings account and then open the ROTH with Vanguard at that point.

As far as funds for IRA's, I am very happy with their "Target Retirement" plans. They are basically just index funds that slowly become more conservative (automatically) the closer you get to your possible retirement date. You can basically "set it and forget it" if you are the type that doesn't want to mess with your allocation mix.

The 8% is a stock market historical average. This means some years it may be up (for example +12%), other years it may be down (say -4%). On average, your returns will likely be in line with the 8% stock market average.

Note that 930k in todays dollars is quite a lot less than future dollars. Again, based on historical averages, inflation averages between 3 and 3.5% (based on my back of the napkin estimates). You can (roughly) subtract this from your 8% gain to realize how long it will take you to save 1 million dollars in todays dollars.

Before you think this is all too dismal and you could do better elsewhere, know that this avenue (the stock market) has outperformed real estate, gold, high yield savings accounts, money market accounts, and most especially stuffing money under your mattress. In fact, there is no better investment mechanism to prepare for a retirement, based on the last 90 years of raw data.

Since you're 28, you could also pick Vanguard's 2040 or 2045 target fund (I'm in one) and do a side by side comparison (using their online tool at vanguard.com). The Star fund is a fixed balance fund (moderate allocation), whereas the target funds allocations change over time (as it gets closer to your retirement) and become more weighted in bonds, etc. than stocks/equities. You might be able to start with the Star and when you get $3000 in there, transfer it over to another fund. The Star might be a little conservative for your young age.

At least the guy at Vanguard was honest and didn't try to say you would get 8% for sure. That's the way it is in the market, but it's better than relying on a 3% online savings or 4%+ CDs. You have 34 to 37 years (unless you retire really early), so you want the highest probability of greatest growth. The longer you have to go, the higher the probability (hopefully ). The other way to think about it (since the market is actually lower than the online savings and CDs right now), is that over the years you will be buying shares cheaper than they will be years from now, so the growth will be much greater (and sort of mushroom up) than trying to accumulate savings in O/L savings and CDs. Of course when the market's down, they deflate, but hopefully after decades, you will be sitting pretty if you can be consistent in your contributions.

Thanks for the response.

debtfree,
I real "mutual funds for dummies" but that book basically just went on and on about how mutual funds are far less risky than individual stocks (which I already knew)... and that I should make sure to get no load mutual funds that are not sector based towards on specific industry, to make sure that are well diversified. Asides from these basic facts I didn't find that book to be very helpful.

The vanguard guy did mention the "Target Retirement" and suggested I go with that and place it on auto pilto which sounds good to to me

specabecca,
So it seems if I'm going to invest this is the best way to about it it. I'm not concerned so much over inflation, I understand that 1 million today is worth more than it will be worth in 30 years. I'll still take that 1 million anyway... anyday even when it will be worth less. This is mainly some additional funds I would like to accumulate by that age... it seems it is VERY easy money to make it if all I have to do is contribue X amount of dollars per month and sit back and have it grow on auto pilot.

My ONLY concern is that I'm going to be contributing let's say $5K per year for 35 years into a ROTH IRA... (or in a few years when I switch to SEP IRA) that in 35 years I'm NOT going to have anywhere near 1 million in my bank account. If I do the above mentioned am I pretty much GUARANTEED to have that 1 million in my account after 35 years? In other words how often do people choose the wrong mutual funds/bonds to invest in with Vanguard that would make this fail? I was just going to pick whichever mutual funds the guy at Vanguard recommended... even after reading books I'm not sure which exact ones to invest in...

Scenario Thinker,

Thanks for your response.
Yes that is exactly what the guy at vanguard told me... to start with the 2045 target retirement. But then don't I have to select which mutual funds it will be investing in? I don't know which ones to pick.

So once I have at least $3K in my ROTH IRA I should immediately switch it away from the STAR and over to another fund in that case. Thanks for clearing that up.

But let's say for example I got 8% some years but then only 1% other years... what if a LOT of those years I get very poor percentage... won't that drastically reduce the mount of money I will have in my account at the end of the 35 years? If for example I had 8% interest for 10 years and then the rest of those years I had only 4%... I would have FAR less in my account at the end of those 35 years than if it stayed at 8%. So what if during that 35 year period I get a lot of years with horribly low interested? Am I being too paranoid?

Or I guess when the interest is very low I am getting more shares at cheaper prices and when it does go back up it will always make up for when it was down?

Where is the book called "Investing For Dumb Blondes"... I think that's the book I should have read

No, that is the mutual fund.


I'm not sure if that easy (there might be a fee), but you could ask. You could also save $3000 in an online savings like DF said.


Welcome to the club. All I can say is I wish I was investing like you are at 28.

You are guaranteed some sum of money between 0 and infinity. That said, you are likely to have about 900k, based on historical averages. If you want guarantees, you must buy into US treasuries, which yields far less (on the order of, or near, inflation. This is much less than the historical stock market average).



It fails when people invest in the stinky mutual funds. I define these as any fund that has a load (a fee you pay to buy it, with a ticker symbol that has an A or B appended to it), or any fund with an expense ratio above .5%. Let me explain.

Let's take your 8% number, then subtract 3.5% for inflation. The other expense you must subtract is the annual expense ratio you have to pay to support the buying and selling within any given fund, as well as any salaries directly linked to the fund. This number varies fund to fund, generally between 0.1% to 3.0%. This leaves the average Joe between 4.4% and 1.5% growth, anually. Naturally, a fund performing at 1.5% growth would be terrible. 4.4% is a significantly better, and higher than 3-3.5% inflation.

There are different flavors of mutual funds out there. Generally, the consumerist in all of us believes that if it costs more, it will probably be of a higher quality. Expense ratios are contrary to this line of thinking. 80% of the time, a lower expense ratio (thus making it an index fund) yields higher fund performance. Similarly, a higher the expense ratio (generally making it a managed fund) yields a lower fund performance.

This is why it is important to purchase mutual funds with a low expense ratio.

Thanks for the explanation, you guys have been very helpful.

Does the 2045 target retirement fund have a low expense ratio?

So as long as I stick with no load mutual funds that are not sector based and have proven to perform well over most periods I should be fine, hopefully

I think the most important thing is that I will have finally started to save, I might suck at it but at least it's better than not having done anything and looking at myself in the mirror thinking should've, could've would've... who took my walking stick and where's my food stamp!

Vanguards Target Retirement Fund 2045:
http://quicktake.morningstar.com/FundNet/Snapshot.aspx?Country=USA&pgid=hetopquote&Symbol=VTIVX

This fund has a 3,000$ minimum investment. It's expense ratio is .19%, so yes, it has a low expense ratio.


I completely agree. Way to go!

specabecca,

Thanks, so that would be a good mutual fund to invest in

That was the initial fund he suggested for me but then it appears he had to switch me over to the STAR fund instead which is a completely different fund because I couldn't afford the $3k... so once I have $3k in my account I should immediately switch over. I'll double check and make sure there are no penalties or fees they will charge me for switching away from STAR over to the Target Retirement 2045.

What would you consider to be a high expense ratio? So I should always make sure that the fund I am investing in is a low expense ratio... thanks that that tip. I see they list the expense ratio next to the funds, so that is helpful

Sorry last question, where does it say what percentage of compounding interest it has at any given time?

EDIT: I think I prefer the Target Retirement 2040 rather than 2045... this way I'll be 60 yrs not 65yrs.

I think it's important to recognize that the return from a fund is not "interest" (like one might get from a bank, which is a given rate at any given time) but a composite return (stock price increases/decreases and dividends, bond interest, etc.) from the individual stocks and bonds that make up the fund. Thus, you can look up the past return of a particular fund, but it will change constantly and is impossible to predict, since it is based on market fluctuations.

Vanguard funds all have very low expense ratios, which is why so many people like them. Some funds out there have expense ratios of 1% and above, which I would personally consider to be high. This is personal preference though, based on your investing philosophy... some people believe that certain funds & fund managers are better at choosing investments (and thus will usually achieve higher returns), which is worth paying the extra $$ for in fees.

The basic idea behind the Target Retirement funds is that stocks are riskier but have potentially a higher return while bonds are safer but with a lower return, so a young person with many years until retirement should have the majority of their investment in stocks, whereas the allocation should move more towards bonds as the person gets older. So the Target funds will manage this allocation and move it for you as you age, whereas with a traditional portfolio you would have to do it yourself. The biggest difference between the Target 2040 and Target 2045 funds is that the Target 2040 will move into the safer investments (with more predictable but potentially lower returns) earlier vs. the Target 2045. You should pick the one that best fits your personal risk tolerance based on how you see your financial future, and not necessarily strictly based on what age you will be. The year is just a rough guideline.

Hope this helped!

T. Rowe Price allows you to open an account on an asset builder program with a minimum of 50.00 per month. They offer many of the same type funds that Vanguard has.

Yes, it's really Vanguard's judgment as to the allocations. Don't think of only your age that the fund is geared toward as much as the risk allocation. So, for example, if you are more risk tolerant, you could go with the 2045, if you are more risk averse, you could go with the 2040. You could even go with the 2050 if you want to be much more risky (89% stocks, 10% bonds), or the retirement fund income (30% stocks, 65% bonds) (or 2005 41%/56%) if you wanted to be much more safe (probably not a good idea at your age). I use the age as a guide and I go the next one riskier (later in year).

Now, these are just the Target funds for retirement we've been talking about. I also have a T. Rowe Price one through my 401(k) at work. There are many more type of funds, Vanguard and all, but this would be a good way to start.

Vanguard's expense ratios, very low .19%/.20%, I have others (I think the TRP one) that are about .75% a little medium, 1% is getting up there, but not terrible, going to 2%, not low, but if you're the type of investor who thinks the fund is going to beat the market, you pay the 2%.

As was mentioned earlier, the lower the ER, it is probably an index fund because it doesn't take as much to mimic the market. The more a manager gets involved buying and selling what they think is going to work, you pay for their salary, plus the commissions to trade (I don't think index funds trade that much to mirror their index).