Roth IRA (is 9% realistic)

[Guest runninlate]

I feel as though I am starting so late but I know that now will still be better than later but I was just wondering on anyones opinion of TD Waterhouse.

I am 38 years old and have run the numbers over and over again on the Roth and traditional IRA calculators(on different sites Legg Mason, TD Waterhouse, my credit union site, ect.)

It seems that if I contribute the full amount to a Roth IRA for 30 years and start taking distributions at the age of 68 I will have aquired roughly 1.5 million (at 9%) and will be able to live off of an annual 50k to 70k (annual interest only )after switching to a conservative 7%.

Can anyone help me with these figures , I have never invested before but have always had it on my mind and feeling that I must do this now.

I have an appointment with a TD Waterhouse financial planner next week so I can start with 2005.

My two questions are: is this very realistic and what is your opinion of TD Waterhouse (I know they are suppose to be a discount brokerage) just want to feel ok with working with them.

I will also be contributing at least the same amount as the Roth IRA to a seperate fund outside of an IRA so I can have other income opportunities that I can always work with (I know I have to be diligent for the next 30 years and I will)

Thanks

[John G]

TD Waterhouse: I have no direct experience with them. But, I have friends that use them. They seem to be similiar to Schwab, Scottrade, Fidelity, Etrade, Brown, and other discount places in terms of internet facilities, some branch office coverage, reliability/errors, fees/commissions, and investment options offered.

On your math:

It seems like you are doing something wrong with your math or there is a typo in your post. My HP 12c calculates that $4000 per year for 30 years (38 to 68) with a return of 9% annually should get your Roth assets to around $545,000. To get to 1.5 million you would have:

(1) contribute $4,000 and compound for 41 years at 9%, or

(2) have a highly unlikely return of 14.3% for 30 years, or

(3) contribute about $9,000 per year (which you can not do right now even if you are married) earning 10% for 30 years.

So....

Some questions for you: What did you assume you would contribute each year? Are you married and would your wife be contributing? Do you have a pension fund, profit sharing plan, 401k, 403b or other employement based program? If you do have an employer sponsored plan, what if any matching amount is offered? What is your approximate annual income? What amount beyond the Roth contribution can you set aside each year. These questions will allow me to give you some feedback on an investment program.

A commonly used "rule of thumb" is that you can safely draw 4 to 5% of your assets in retirement. The reason you should not assume drawing off "the interest" is that your principal can flucuate with market conditions. You just don't grind out 9% or 7% every year. The lower draw down rate is supposed to assure that you don't out live your money.

While you are off to a late start, you can develop a package that will work. You might want to read a recent book - The Number by Eisenstat which is about adult anxiety over retirement planning and provides a number of prospectives on the investment process.

The clock is ticking for 2005. You definitely want to open a Roth for last year before that window of opportunity closes.

[Guest runninlate]

Thanks John G some answers to your questions are:

I did use $4500 instead of $4000 just to adjust for the change in max contribution in 2008 and I know it is changing to $5000 for inflation.

I am not married but have been with someone for 7 years we will probably be married within the next 5 years.

I have no employee pension funds, 401 ks, or anything with my employer(small company in which I have a big hand in).

Basically I was planning on making sure that for the next 30 years I make the income needed to stay within the best requirements scenerio for the Roth.

I will be investing $2000 for 2005 and the full amount allowed from 2006 on to whenever but at least 30years

I will also be investing roughly the same amount around $4500 per year to what ever investments I can for the sake of lost time and future security.

So in all with about $9500 or more (depending on my situation) but at least $9500 annually being invested I should be able to reach at least 1 million (just a personal minimum goal I have I guess) by the time I am 68 years old.

My cost of living will be ( using the rate of inflation at 4%) after the house is paid off will be around $2000 to $2500 per month, depending on health care, any extra would be just that.

I just went on morningstar.com and used th IRA calculator and this site adjusts for the $2000 change in the year 2010 providing congress does'nt change the law.

and the figure is closer to what you had. Thanks

I guess my concern was and is will just a Roth support my retirement expenses alone and it looks like it will even though I am starting so late.

I should be able to cover all of my expenses with inflation with some money left over every month with just the Roth.

Now like I said before I will be investing an additional $4500 per year (just what I can afford currently) in

what ever other account I can learn and earn on.

Any advice on where to start with this additional type ?

[John G]

A quick reply so you have some pointers on how to take action this week.

1. If possible, full contribute as 2005 Roth contribution which allows you to put more of your maximum annual into the Roth later this year. If you have the cash right now, fully fund 2005 and 2006. If not, fully fund what you can in 2005 and then set up an automatic monthly draw on your checking account.

2. You need to pick a custodian ASAP - and TD will do - because of the pending 2005 deadline. Deposit your contribution and then hunt through your custodian's list of mutual funds for a single fund. Use these quick and dirty screening criteria for now: fund rated 4 or 5 stars by Morningstar (to cut down the 8,000), only from NO LOAD, broadly based fund, annual expenses below average for its catagory, and a track record of 5+ years (ideally 10+ yrs).

Example of this process - using Schwab mutual fund advanced screening system. I asked for equity funds, no load available via Schwab, with 5 year performance data, Morningstar rank of 4+, no worse than average risk (by Schwabs mathematical standards) and below average annual expeses. This search produced 77 mutual funds. (there are over 8,000 mutual funds)

Here are two examples from this search:

Janus Growth and Income, no load, 0.87% annual fee, earning around 12% annually since 1991, five star, large company size, emphasis on growth. Portfolio is 67% domestic stocks, top ten holdings account for 30% of the fund.

Ariel - a mid-size company (mid cap) fund that is a blend of value and growth styles, started in 1986, Morningstar 4 stars, over 13% annual since inception, 4 billion in assets, 1% annual expenses, 99% domestic stocks

Note, this is not an endorsement of either mutual fund. I have no ties with either fund. These funds are used as an examples of how you might use screening tools to look for what would hopefully be an above average fund.

If you did this search at TD, Etrade, or Fidelity you would get a different list of funds because not all discount brokerages give you access to every fund.

Alternatively, you could look for a broadly based index fund with ultra low annual expenses (0.22% or lower) as you initial fund.

[Guest runninlate]

Thanks John G for all of your help !