Need guidance

[Guest Wedge1]

I worked for myself for 8 years (actually, I worked for my dad in a family business), but I never began an IRA or any other type of retirement savings account. And if he (my dad) set money aside in some account for me, I am not aware of it.

We sold the business when he decided to retire, and I took time to go back to college to earn M.S. in Operations Management. I got a new job about 3 months ago in management with a very successful manufacturing plant starting at $36,000 a year. Not a hair-raising salary, but a good start. To my understanding, it will lead to better things.

I am 35 and single, although I do hope to marry some day. Currently, I am in a good position to invest the greater portion of the money I make because I do not have much in the way of expenses. I want to begin a retirement account.

My company will match 40 cents to every dollar I place into my 401K after I have been employed with them for 1 year (up to 6% of my salary max), so I will maximize that opportunity as it becomes available. Presently, 3% of my pre-tax salary is automatically placed into the 401K plan, and I have voluntarilary contributed an extra 3%. All of this is going into the Vanguard Prime Money Market Fund, a fund which I know very little about, except to say that it is probably a low-risk, low-yielding, and very stable long-term fund.

To my understanding, because I have contributed an extra 3% of my pre-tax salary, I have decision-making authority to shift the entire amount to any of 15 available funds offered by Vanguard in addition to the (default) Prime Money Market Fund. I would like some help in this area. Questions that immediately come to mind are: Am I under-utilizing this option by not investing more? Should I consider a mix of these funds, or stay in the Prime Money Market Fund, and look elsewhere for other investments?

In addition to this, I am preparing to create an IRA, but I am unsure which is really the better alternative between a regular IRA or the Roth. It seems to me the only advantage of having a Roth is the flexibility the account would offer under various circumstances. Being taxed now rather than later, however, seems to go against the convention that a dollar in hand today is worth more than a dollar tomorrow (more growing power in the former). I do anticipate salary increases and more pay-out in the form of taxes as time goes by.

Because I am a novice at this, I am asking that the more experienced place themselves in my shoes for a moment and run with the information i have provided. If I have left out a key detail, just let me know. As for my goals, the only thing I want at this point is to maximize long-term wealth, but I am open to making some moderate-to-high risk investments at this point in my life.

[Guest Wedge1]

Okay maybe I should ask the following: in addition to an IRA and a 401K, which alternatives might a begginer focus on for retirement savings? What might be the wisest retirement investment in addition to an IRA and 401K?

[John G]

Here are four areas to focus upon in the next ten years:

1. Fund any retirement plan (like your current 401k) that has a match to collect the maximum match.

2. Open a Roth account and if possible fully fund it each year.

3. Although #2 can partially serve as a contingency fund, if you still have funds available after 1 and 2, start accumulating funds in a taxable account.

4. At some point you may consider buying a home... probably not now as you are unmarried and may switch jobs more in your 30s. Home ownership often allows you to build equity.... on the flip side, you will have lawns to mow and stuff to fix. Over many years, home ownership is, for many people, intrinsicly more valuable plus a good way to build equity.

Concerning what kinds of investments: money market is a low yielding investment and more or less just marks along at the rate of inflation. Thats OK for a small part of your "contingency" funds. Your multi-decade wealth building money should be invested in no load mutual funds that are in the stock market. A Vanguard index based upon the total market or the S&P500 is a reasonable choice for now. As you learn more about invesing and mutual funds, you may want to select a fund with a slight bias towards growth.

[Guest Wedge1]

Can you offer a book that deals with no load mutual funds and/or stock investing that you feel is an informative read? Amazon's list is long, though I am thinking of buying The Random Walk Guide to Investing: Ten Rules for Financial Success.

[John G]

There are many good books. You might try the Boglehead's Guide to Investing which covers all of the basics. Morningstar has a book called Guide to Mutual Funds which I have not seen, but since that is their area of expertise, it should be a worthwhile read. The Wall Street Journal has Your Guide to Understanding Investing, which is like the USA Today version with lots of charts, photos and "human interest" but is thin on details.

Magazines: Kiplinger Financial, Money, Consumer Reports (not this year for some unknown reason, but prior March issues had a good summary of retirement investing and listed 100 good mutual funds)