Thursday, March 28, 2013

Don't Let Yourself Lose $125,000

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Word to the wise: This post is long, and details how to set up an IRA to help you be rich when you are old. If that does not interest you, I would recommend not bothering to read this post.

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. 
You get the point.

Who Do You Send your Money To?

Got your $50? Good. Now we're going to send it to someone. This person will safeguard it, and watch it grow, every year, until you are a rich old man, then they'll give it back to you. 

This person is known as a "broker". You've probably heard of a lot of them: Charles Schwab, Fidelity, TD Ameritrade, Scottrade, E-Trade, and about a zillion others.

To save you some time, I did the research for you and broke it down. If you don't want to read through the details: The Winner is Scottrade, with Fidelity in a close second place.

I looked at 5 factors for each brokerage house.
  1. Minimum Amount to Open a Roth IRA - this is very important
  2. NTF Mutual Funds
  3. NTF ETF's
  4. Stock Trade Commission
  5. SmartMoney Customer Service Rating

Vocabulary

  • 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?

Scottrade

Minimum to Open an Account: $0
NTF Mutual Funds: >3,100
NTF ETF's: None
Stock Trades: $7
SmartMoney Customer Service Rating: 4/5

E-Trade

Minimum to Open an Account: $0
NTF Mutual Funds: 1,300
NTF ETF's: 80
Stock Trades: $9.99
SmartMoney Customer Service Rating: 4/5

TD Ameritrade

Minimum to Open an Account: $0
NTF Mutual Funds: <1,000 
NTF ETF's: >100
Stock Trades: $9.99
SmartMoney Customer Service Rating: 3/5

Fidelity

Minimum to Open an Account: $0
NTF Mutual Funds: 2847 (as of 3/19/2013)
NTF ETF's: 65
Stock Trades: 7.95
SmartMoney Customer Service Rating: 3/5

Charles Schwab

Minimum to Open an Account: $1,000
NTF Mutual Funds: >1,000
NTF ETF's: >100
Stock Trades: $8.95
SmartMoney Customer Service Rating: 3/5


Those are the big brokerage houses - in some cases, your bank may offer a Roth IRA. I do not recommend this, as you can usually only invest in a very limited number of places. You want flexibility here.

The Winner is: Scottrade
Though Fidelity comes in a close second

Honestly, it's hard to go wrong with one of these brokers. Go to their websites, see which one feels best for you (personally, I found Schwab's website to be painfully difficult to navigate) and go with it. If you hate it later on, you can switch it up (though for simplicity's sake, you shouldn't)


How to Start the Investment

Open an Account

Go to the website of your preferred broker.
Click on "Roth IRA" - usually tucked under a section called "retirement"
Click on "Open an Account"
They'll take it from there.

I know I I'm holding your hand through that process, but I want to make sure you have EVERYTHING you need.

Choose a "funding source"

When they ask for a source of funds-this just means where will your money come from - you should enter your bank account information - account number and routing number. You should have your account number...and your routing number can usually be obtained from your bank website, or from the bottom of your checks if you have check writing available.

Choose your base investment

I want to make this easy for you, so the simple option is what I'll present first. If you want to make more complex investments, then I'll provide some resources for you, but you'll have to do your own homework. E-mail and let me know if you'd like a more in depth view of complex investments done here.

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:
65-24=41
41+2,013=2054

Now, a quiz. If you were presented with the following options for funds, which is correct for me:

  1. Target Date Fund 2035
  2. Target Date Fund 2040
  3. Target Date Fund 2045
  4. Target Date Fund 2050
  5. 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.
Investing like a Pro (Not Recommended for most)
For a more detailed primer on how to invest your money, I have 4 sources for you:


Growing Your Investment

You've done the hard part! Yay!

Now comes the easy part. Figure out how to automatically deposit more money into your account. This can be via direct deposit from your employer, or via a monthly draw from your bank account. Find a way to make it automatic, though. That way, the computers will keep investing for you, and you won't have to rely on yourself to remember. 

$50, $25, $10, whatever you can afford - you should invest it.

You'll set up two moves, actually:

  1. $50 automatically transferred (or, ideally, direct deposited) into your account at the start of every month (right after pay day)
  2. $50 automatically invested into your fund of choice

A Word of Caution about Automatic Investing

You need to ensure that your fund allows automatic investing (most target date funds should), and confirm a second time that there is no fee for investing. It's pointless to invest $50 in your fund if it will charge $75 to do so. A little homework here goes a long way.

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?

If you truly don't have the $50 to spare right now, then find a way to save it. But if you do (and don't try to fool me, most of you have way more than $50 to spare right now), then now is the time to start your IRA. 

You don't want to be Poor When You Get Old, so now is the time to start investing.

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

$50,000 can buy a lot of Viagra and prune juice!
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