Young whipper-snapper thinking ahead

[Guest jamison]

I am 24, I am getting married in a month, she is 23. We want to start a Roth IRA to retire at 60 or 65. We collectively make about 55,000 to 60,000 a year. We are waiting until we get married to talk to a bank about starting a Roth. But can anyone give me any 'newboe' tips? How much I can expect to contribute, what is the minimum you can start a Roth with, etc.

thanks all

jamison

[John G]

Congratulations for thinking ahead. Starting early will very likely put you on the path to a very comfortable future. If you each set aside $2000 each year and invest wisely you have excellant prospects for becoming millionaires and then some!

Roth 101: Current maximum is $2000 each for husband and wife as long as the total earned income for either exceeds that amount. Recently discussed legislation would increase the contribution ceiling to $5000, but that is likely to be vetoed by President Clinton. Some kind of IRA contribution increase is likely in the next couple of years... but for now your combined max is $4000. I am assuming that you will filled your taxes as "married filing jointly" for this year.

IRAs (all kinds) are INDIVIDUAL accounts. Your assets will be separate from your wife's assets.

Roth IRAs do not provide a initial tax deduction. Regular IRA maybe deductable, depending upon your income. Roth IRA has no set payout schedule, regular IRA does and it can be messy. Both types of IRAs build assets in a tax sheltered environment. Roth assets are not taxed at dispursement. Regular IRA withdrawals are taxed as ordinary income. There are also some inheritance issues that may favor the Roth.... but since you are just getting married I think you can ignor that for a while!

Given the potential long holding period, I would assume that the Roth will be more advantageous. Note, no one can tell you for sure which type of IRA is best because there are just too many parameters and the regulations can change. I can tell you that in most scenarios that I run the Roth comes out ahead because the initial tax deduction of a standard IRA is overwhelmed by the tax free Roth distributions and other features.

You mentioned going to a bank after you get married. I sure hope you are not thinking about a savings accout or a CD. You are looking at 40 years of investing... and perhaps a lot longer since you never take out all the funds in your first retirement year. I would recommend that you consider a broad based stock mutual fund. There are more than 8000 mutual funds, you should look for a NO LOAD (no initial percent fee) fund. You can contact a mutual fund company directly (see the March or April issue of Consumer Reports for a screened list with phone numbers) or deposit your funds at Etrade, Schwab or other brokerage that offers hundreds of mutual fund choices. Contact atleast three potential custodians. Ask them for their "newbie" brochures on investing, IRAs, Roths. Ask them about minimum initial deposits, fees, and various mutual funds.

Why stock? Because over the long haul, stocks traditionally out perform savings accounts, money market accounts, CDs and bonds. Different asset classes may out perform in any given year, but if you look at any holding period greater than 20 years common stocks are the clear winners. Time is an investors friend. If you go back and look at the performance of long running mutual funds you often will find that up years outnumber down years anywhere from 6:1 to 10:1 and that the best up years typically are more up than the worse busts.

Why mutual fund? You can buy by specified $ amounts. Very diversified. More efficient than purchasing odd lots of stocks. Easier to track. Easy to buy or sell (liquid). Etc.

I would keep things reasonable simple the first few years. Educate yourself about investing. Then after your assets grow, you may want to invest in individual stocks.

Since you are in the learning mode, I would suggest that you and your wife read up on mutual funds in that Consumer Reports issue that focuses on retirement planning, or in Kiplinger Finance, Money or Worth magazines. You might learn more if you each pick a different fund. After a year, compare results. Then either add the next year contribution to the first two funds, or pick another pair of funds. While you don't want new funds every year, what you will learn from tracking a few funds initially will be valuable. My personal view is that increasing your knowledge is more important than worrying about returns in the first few years.

Some custodians charge annual fees for maintaining IRA accounts. But many custodians either do not charge fees or will waive the fee upon request. If you set up a monthy deposit plan that connects to your checking account you often will get the fees waived. Fees also are often waived after your assets grow, or if you have other assets/accounts with the custodian.

You did not say anything about retirement/investment options related to you employment. Many of these options include a company match. If your funds for investing are limited, a employee matching account might be superior to the Roth. Generally, you want to look at this decision each year.

Good luck investing. Good luck with your marriage.

I will try and answer additional questions here or if you wish to email.[Edited by John G on 07-31-2000 at 12:32 PM]

[John G]

Kiplinger mag just published their mutual fund summary for mid year. Relative to the bank/cd vs stock investment issues I raised in prior message, here are the 20 year annualized performance of various asset catagories:

Stocks

Aggressive growth funds 16.6%

Long term growth 16.9

Growth and Income 15.1

Balanced 13.2

International/sector [not enough with 20 yrs in my view]

Bonds

Investment grade corporate 9.3

US Government 8.3

Kiplinger does not disclose how many mutual funds in each catagory and provides limited info on the definitions.

Some hypotheticals based on historical data.... The twenty year data supports the conclusion that if you will be investing for 20+ years you want to be in equities. After two decades, the all equity approach is worth about 3X more than all bonds... using 15% vs 9%. After three decades the stock route grows to 5x the all bonds. At 40 years the difference is 8x. All of these #x ratios grow if you are comparing equities to conservative bank CDs.

Investment novices should note that in any given year the performance of equities can swing rather violently and you can have back to back negative years. However, IRA/Roth investments are often held for more than 20 years and the long term advantages of equities (stocks) is considerable.

[Bill Berke]

You are right, it is never too early to save. Try joining the American Association of Individual Investors (AAII)in Chicago, and on the web. I have found that their monthly magazine is one of the best, accurate and objective money/financial planning teaching publications. And they have lots of great educational materials. It is $49 well spent. And congratulations for your forward thinking.