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Guest Freestyla

18-year old starting (Roth) IRA?

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Guest Freestyla

Hello everyone,

I'm 18 years old, will be attending Bentley College next fall and I'm thinking deeply about my future. I've been told by some adults I know (who aren't necessarily too knowledgable about IRAs) that I should set up a Roth IRA ASAP.

I've read about some people who set up Roth IRAs for their children, but mine didn't for me.

Based on what I know, I believe that the sooner I start investing in my IRA, the more money I can make in the long run because of compounding.

My parents want me to do well in life (obviously), but they really don't know a whole lot about finances and as a result, my family isn't so well off financially. My parents are immigrants and I'm grateful for all they have done for me, but I want my children to be more stable financially than I was/am. As I previously said, I'll be attending Bentley on a big scholarship and I hope to major in either finance or accounting. I want to be as knowledgable as I can, as early as I can.

I earn about $100 taxed dollars a week so I make a few thousand a year. However, I will also be starting another job soon for the summer so I will be making enough money to provide for all the essentials my parents don't provide while still being able to contribute to my IRA. I am willing to put in the maximum amount into my Roth IRA annually, which I believe is $5000 for me since I am under 50.

I think I would probably want to start the IRA at my bank since I already have a checking/savings account with them, but is that the best idea?

I anticipate that I will be making at least $50,000 once I get my bachelors since the median starting salary for a Bentley grad is $47,500 and I will be in the honors program so I expect to be in the upper quartile of my class in terms of annual salary after graduation. Obviously, I really can't say how much money I'll be making years from now though.

I may not know as I should, wanting to start my IRA, but any help or advice would be greatly appreciated. Thank you.

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Guest Freestyla

Also, I have a verified e-trade account, if it matters, but haven't done anything with it yet. It seems confusing. I initially set it up to invest in stock, but I don't know how good of an idea that is since I am not too financially knowledgable right now.

I've been browsing through the board, reading some of the responses from people like John G and ElGuapo... And WOW! You guys should be getting paid for your responses!

Thanks guys.

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If you have the money and can start at age 18, you would have a tremendous head start on your retirement savings. You mention that you have scholarships, which I take to mean you are not taking out student loans, so you would not be borrowing from one place to invest in another (leveraged investing would make the answer much more complicated).

Bank vs investment company

The real question is long term rate of return. The larger the average return, the greater the effect of compounding. A bank is likely to offer CDs which might average 3-5%. A diversified selection of mutual funds is likely to average 5-8%. (Results might be higher or lower, but those are realistic numbers.) As you have many years until you reach retirement, you want to give your investments a good chance to grow. And you especially want to be sure those investments stay ahead of inflation, which is sometimes a risk in CDs and money market accounts.

Stocks vs mutual funds

I'd encourage you to read websites like Motley Fool. One common bit of advice you'll find is that for an average investor who doesn't have a large amount of money to invest, mutual funds are often a better choice. They require you to spend less time doing research and they can have less risk than individual stocks. One concept you'll learn about is diversification; an easy way to explain it is w/ the saying "don't put all your eggs in one basket". A mutual fund has many stocks in it, so if one stock goes really bad, it doesn't destroy your entire savings. Your savings will still go up and down w/ the market, but over the many years you have until retirement, the market should go up overall. A safe historical stock market average is 8%.

If you wanted a reasonable mutual fund choice until you learn more about investing, you might start with one or two "index" funds. Perhaps one based on the S&P 500 index and one based on the Nasdaq index. As you learn more about investing, you'll likely move to different funds, but as an initial investment, an index fund would give you diversification and market exposure w/out some of the higher risk that some other funds might have before you fully understand them. And learning to watch the indexes will help you to gain a broader understanding of the market, which will help you if you do pursue a degree in finance.

Future value function in Excel

Excel has a function that helps you to see the value of compounding. Set up a spreadsheet as follows:

Cell A1: 5000 {this is your annual contribution}

Cell A2: 5% {this is the rate of return}

Cell A3: 65 {this is your age at retirement}

Cell A4: 18 {this is your age when you start making contributions}

Cell A5: =FV(A2,A3-A4,-A1)

Now, play with changing the rate of return (say, from 3% up to 8%) and the age you start making contributions (say, from 18 to 25).

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masteff has given you an excellent answer.

Another advantage of index funds is that their expense ratios are generally lower than other mutual funds. The mutual fund takes a percentage out of your account as a fee to pay the expenses of running your account. This happens automatically, and the share price (NAV) for your fund that you read in the newspaper or on-line is the share value after the fund has taken its fee. These fees can be 1% or more for some funds, but for the more common index funds, they are usually below 0.5%. Obviously, the less you pay in fees, the more you keep in your account to generate earnings.

I recommend that you look for "no load" funds. There are lots of them. Loads are payments the fund company collects out the money you invest when you buy into the fund (front-end load) or when you sell it (back-end load). Just because a fund has loads or other fees does not mean it's a bad investment. To get the same return as a no-load, low fee fund, however, it has to produce a higher rate of return.

Congratulations on starting your investments early. I wish I had.

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Guest Freestyla

Thanks a lot guys. Do you have any specific recommendations on what places I should consider investing with?

I'd prefer if I could access my IRA and make transfers online. As I mentioned before, I have an e-trade account, but I find it hard to tell what's good and what's not. I wish I was a bit more knowledgeable. Do you recommend any book in particular for someone who wants to learn about IRAs/investing/finance?

Like I (think I) said, I will probably be majoring or at least minoring in finance in college, so I want to learn NOW!

Thanks.

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Freestyla,

Let me also add my sincere "encouragement" to your efforts.

Nearly all of the major mutual fund companies (e.g., Fidelity, Vanguard, T. Rowe Price, etc.) and on-line brokerage firms (e.g. Charles Schwab, TD Waterhouse, etc.) have a "Beginner's Guide to Investing" (or similar) on their respective websites - a good - and inexpensive - place to start.

I also would recommend the following books - all written for the "newbie" and "non-professional":

Saving for Retirement (without living like a pauper or winning the lottery) - Gail MarksJarvis

The Lazy Person's Guide to Investing - Paul B. Farrell, J.D, Ph.D.

The Only Guide to a Winning Investment Strategy You'll Ever Need - Larry E. Swedroe

Good luck!

SmB

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This board usually avoids giving specific investment advice as it's really more focused to employee benefit plans.

Motley Fool is a good investment education website. They have plenty of good free information and an active discussion board. They have daily and weekly articles, a few of which are even published in some local newspapers. http://www.fool.com/

If you're comfortable w/ E-Trade, then that might be place to start (I don't have an account w/ them but don't know any reason why it would be a bad choice). They also have investment information on their website and have listings of the mutual funds they offer, including their own index funds.

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I would add WSJ Guide to Understanding Money & Investing. If you are starting out, stick with Mutual Funds.

Seek tax advice if you are investing mutual funds in taxable account.

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You can get started without knowing a huge amount about investing. Lets keep it simple: (1) find a custodian (Etrade, Schwab, Fidelity, or any of the mutual fund families, etc.) that will allow you to open a Roth at your age. (2) make a full or partial contribution to get started (you "dollar cost average" if you set up a monthly program of automatic contributions), (3) narrow you choices to a single NO LOAD mutual fund with expenses below the industry average. Such a fund can be an index fund or any broad themed fund. Read your montly statements to confirm all of the above got done.

Then.....forget about your Roth and focus on your education. Do an annual review - make the decisions about contributions for the new year, perhaps consider a second fund at some point. Time is the number 1 friend of an investor. Don't spend a lot of time trying for perfection - you won't find it. Do spend some time learning more -- via your classes and watching your mutual fund choice. Becoming knowledgable about investing takes decades, not weeks.

I have a suggestion for 2 hours a month of outside reading: Kiplinger's Financial magazine. It covers investing basics, mutual funds, stocks, credit, home ownership plus a few articles about technology/cars that you might want to buy down the road. Annual subscription is about $15.

Besides the beginner materials almost all mutual funds and brokerages produce, you will find interesting material on the web and at any local library.

Perhaps you might want to start an investing club at your college. Also, some universities (I know Harvard, Yale, Penn, and Penn State do this) have business students run an investment portfolio...learning to research companies and evaluate financial data. Ask your professors about this. If they don't have a program like this, march down the dean's office and suggest it. Students who initiate or lead programs are highly prized upon graduation. You learn a lot more in experential education activities.

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Guest Freestyla

Thanks for all the help everyone.

I was looking at different mutual fund companies online and found that Charles Schwab seemed to be a great fit for me. Though I didn't even have an account, someone was made available to speak with me over the phone, basically answering any questions I had. I learned A LOT about IRAs altogether and he gave me his name and phone number so I could contact him again in the future if necessary.

There are no-load funds available and there is virtually no charge for what I intend on doing, except the small percantage taken by the managers of whatever mutual fund I choose to be a part of.

As an example, the consultant(?) showed me a mutual fund and he said it would be a pretty good one to invest in, based on my ave, goals, experience, ect.

What do you guys think? "AROIX" - http://www.smartmoney.com/fundsnapshots/in...mp;symbol=AROIX

Do you guys have any other American Century mutual fund recommendations? I know this board veers away from specfic help, but I don't want to do something stupid. Is AROIX a good fit for me?

As someone mentioned, I definitely will be taking part in the investment club at Bentley College (There already is one). I learned about it a while ago when I went to visit the school.

I will probably be creating my Schwab account right after I post this message; I like Schwab because free help is available via telephone all the time and I think that is pretty important for me because I'm a beginner.

I'll also probably be either subscribing to Kiplinger or buying a book soon.

Thanks everyone. I feel like I've made a lot of progress in very few days.

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I like the low expense ratio and the high performance ratings of your choice. It appears to be doing better than its benchmarks over the past 1 and 3 years. (Of course, as you will read many times, past performance is not a guarantee of future returns.)

If you go with a Roth IRA, the low rating for tax efficiency does not matter (no tax on Roth earnings).

Regarding magazines and books, start at the library (the free book store). Books are pretty pricy these days, and you can put the money you save into your new Roth.

Good luck.

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"My parents want me to do well in life"

Be sure to keep your overall perspective as well. Although the world tends to view success by looking at wealth, fame, academic, or other achievements, a true measure of success does not depend upon any of those (IMHO, FWIW).

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Here is some feedback on AROIX. This is a "target" style fund. Yes, its NO LOAD. Yes, it has 0.20% annual expense rate which is low. Two good points.

But, you should also understand that it is currently a large cap growth fund. So it will focus mostly on very large companies that are growing faster than industry averages...like Google, Intel, etc. Nothing wrong with that, you get some diversification in that the fund holds many stocks, but note that you don't have small and mid size company represented in the portfolio and they shy away from the "value" style, or special situation investing. Currently, about 7% is in cash, and 11% in bonds (these components will increase later) so you are not 100% invested in the stock market. I did not see a breakdown on domestic vs international. All of the above are diagnostic in nature, they don't say that AROIX is good or bad. (no one can tell you if any single fund will out perform the "pack" in the future... that includes me)

What is a "target" fund? Basically its a marketing gimic, a new concept that the mutual fund industry invented to sell to beginners like your self, or mid-life folks who just find investing too confusing. Over time, the AROIX will migrate from the fund you see now to a fund more heavily based upon bonds and income producing funds. "Automatic" seems to work for a lot of folks and money is moving towards target funds. Simple sells. Lots of mutual fund families have created these in the past five years. But remember, your long term interests may not coincide with the changes that will be made in this fund. So, at some point you may want to make other choices.

This fund is just fine for you. But, I think that as you learn more about investing, you will want to consider other options. Don't buy into the "auto pilot investing" that the industry pitches with target funds. You need to think about what you are doing....but that can wait until you finish college.

Best of luck. Post again if you have questions.

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Guest mandyjune

Hello everyone,

It is true that the sooner you set up your Roth IRA the better. I think it's great that you're considering setting one up at such a young age because many people our age are not even thinking about saving, especially when college is in the picture as well. The younger you start investing in your Roth IRA, the more you'll have in your portfolio later on. I just completed my first year of college and am considering setting one up this summer. Here's an article that shows you an easy way to set up Roth IRAs. Hope it helps you guys and please do update us on your progress!

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Hello Freestyla, I know this is 10 years later but I just did the exact same thing you did, started a roth acciunt with Charles when I was 18. I hope more peopple around this age will become more aware of retirement saving.

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