I'm 23 years old right now and I want to figure out the best way to go about retiring a millionaire. I'm not sure what to do though because there seems to be a lot of different ways to go about it. Someone told me that I could just open a savings account at my bank and put $7,000 - $10,000 a year into it and easily retire a millionaire. What about IRAs, annuities, etc.? Would that be better than a savings account? I just don't want to end up like my parents, who are in debt and barely staying above water.
Saving for Retirement
- Thread starter tj1320
- Start date
Retirement saving has something to do with compound interest. In order to make the compound interest take effect you have to be young. In your case, it's a perfect scenario. You need to do in two steps. First, save as much as you can. Second, find a good investment that can give a nice return year after year. To do so you have two options, self-directed investment or give it to a firm to do it for example Franklin Templeton Investments, Fidelity, etc. You need to investigate to find out which investment firm is the best for you based on your investment style.
in my opinion:
1. Roth IRA is the way to go if you are young. Forget the small deduction on your taxes that would favor a traditional IRA, as future tax rates are likely to be higher than lower and your nest egg will probably be taxed at a 40-50% rate. The Roth IRA gets you out of that situation, and all disbursements will be tax-free once you retire. (after 59 1/2)
2. Tax deferred in a MATCHING 401K is Ok, but only up to the match. Forget about an annuity unless you are at maximum deductions - that would be a maximum 401K contribution ($42,000 usually) and IRA ($4000). If you are earning enough to contribute that much, you probably have a financial advisor already.
3. Asset allocation is important, but you need to be heavily diversified. This doesn't mean just 60% equities and 40% bonds. It includes large and small cap value, inflation adjusted securities and other domestic bonds, foreign stocks and bonds and emerging markets. It includes metals, energy, and closed end funds trading at discounts.
And remember - CASH is an asset class also!
4. It is hard when starting out as your $1000-$3000 that you can scrape together to put in is treated with contempt by many of the fund companies who pile on additional fees, etc... Don't worry - just get the money in there - cash/money market is OK too. After about 5 years, you will have a sufficient amount to diversify appropriately. As you keep adding funds, if you lose a little to fees, so be it. As you are undoubtedly aware, this is a long-term play.
5. Never pay a fee for a fund until you have so much $$ in you account that you are looking for unusual opportunities.
6. Indexing is OK, but don't build your entire portfolio around it. Some of the best current investments are not indexed. What worked great for the last 25 years may not work so great for the next 10. While you can congratulate yourself that you didn't pay excessive fees, if you return is anaemic, wouldn't you have preferred to pay a 12-1-b fee and get a bit more out of it?
7. Finally, there is a useful way to avoid you parent's situation - don't get into debt. Live well beneath your means and only accept debt for education, housing, or a car, and then prepay those debts (if it makes financial sense to do so - i.e. short term bank interest rates are below your interest rate on the debt).
None of this is particularly sexy, I'm afraid, but that's how it works.
For a investor starting out currently, I would recommend reading Ed Easterling's Unexpected Returns. I think it may help.
I am not an investment advisor, and you are directed to consult appropriate investment, financial, tax, and legal advisors to decide any specifics about your particular situation. (disclaimer)
1. Roth IRA is the way to go if you are young. Forget the small deduction on your taxes that would favor a traditional IRA, as future tax rates are likely to be higher than lower and your nest egg will probably be taxed at a 40-50% rate. The Roth IRA gets you out of that situation, and all disbursements will be tax-free once you retire. (after 59 1/2)
2. Tax deferred in a MATCHING 401K is Ok, but only up to the match. Forget about an annuity unless you are at maximum deductions - that would be a maximum 401K contribution ($42,000 usually) and IRA ($4000). If you are earning enough to contribute that much, you probably have a financial advisor already.
3. Asset allocation is important, but you need to be heavily diversified. This doesn't mean just 60% equities and 40% bonds. It includes large and small cap value, inflation adjusted securities and other domestic bonds, foreign stocks and bonds and emerging markets. It includes metals, energy, and closed end funds trading at discounts.
And remember - CASH is an asset class also!
4. It is hard when starting out as your $1000-$3000 that you can scrape together to put in is treated with contempt by many of the fund companies who pile on additional fees, etc... Don't worry - just get the money in there - cash/money market is OK too. After about 5 years, you will have a sufficient amount to diversify appropriately. As you keep adding funds, if you lose a little to fees, so be it. As you are undoubtedly aware, this is a long-term play.
5. Never pay a fee for a fund until you have so much $$ in you account that you are looking for unusual opportunities.
6. Indexing is OK, but don't build your entire portfolio around it. Some of the best current investments are not indexed. What worked great for the last 25 years may not work so great for the next 10. While you can congratulate yourself that you didn't pay excessive fees, if you return is anaemic, wouldn't you have preferred to pay a 12-1-b fee and get a bit more out of it?
7. Finally, there is a useful way to avoid you parent's situation - don't get into debt. Live well beneath your means and only accept debt for education, housing, or a car, and then prepay those debts (if it makes financial sense to do so - i.e. short term bank interest rates are below your interest rate on the debt).
None of this is particularly sexy, I'm afraid, but that's how it works.
For a investor starting out currently, I would recommend reading Ed Easterling's Unexpected Returns. I think it may help.
I am not an investment advisor, and you are directed to consult appropriate investment, financial, tax, and legal advisors to decide any specifics about your particular situation. (disclaimer)
Thanks for the help guys. I forgot that I have a sharebuilder account with Wells Fargo and here is what it told me (Portfolio Builder) to do over the long term for aggressive growth and higher risk:
Total of $400 per month, will be more as I make more money.
(EFA) EURO-ASIA INDX (MSCI-ISHARES) $60
(IWD) RUSSELL 1000 VALUE (ISHARES) $172
(IWF) RUSSELL 1000 GROWTH (ISHARES) $152
(TIP) LEH US TREAS INF FD (ISHARES) $16
I also have an account with optionsXpress that I trade mainly options with so most of whatever I gain from it will be put into the sharebuilder plan also. Does this sound like a good plan at age 23? I'm thinking about doing this instead of Fidelity, etc.
Total of $400 per month, will be more as I make more money.
(EFA) EURO-ASIA INDX (MSCI-ISHARES) $60
(IWD) RUSSELL 1000 VALUE (ISHARES) $172
(IWF) RUSSELL 1000 GROWTH (ISHARES) $152
(TIP) LEH US TREAS INF FD (ISHARES) $16
I also have an account with optionsXpress that I trade mainly options with so most of whatever I gain from it will be put into the sharebuilder plan also. Does this sound like a good plan at age 23? I'm thinking about doing this instead of Fidelity, etc.
My wife and I are in our mid twenties (around you age) also, besides our trading accounts we have our retirements split about 55% International Equities (weighted toward Asia) and 45% Domestic Equities. We have a gain around 9.5% this year so far for our retirement funds, I look things over a lot but don't actually change things up but once every 6-9 months on average.
Just to give you an idea:
If you deposit $400 per month for 30years with a starting balance of $1,000, you would need to earn 10.37% per year to get you $1,000,000.
Now the 10.37% isn't too diffcult, nor too easy...but what's a $1,000,000 really gonna get you in 30years?
Now if you want $5,000,000 you'll need to put away $2,036 per month using the same variables as above.
Start saving!
And good luck.
If you deposit $400 per month for 30years with a starting balance of $1,000, you would need to earn 10.37% per year to get you $1,000,000.
Now the 10.37% isn't too diffcult, nor too easy...but what's a $1,000,000 really gonna get you in 30years?
Now if you want $5,000,000 you'll need to put away $2,036 per month using the same variables as above.
Start saving!
And good luck.
1. The disciplined approach you are choosing is entirely appropriate for a long term, small amount investor such as yourself, who is unable to trade larger sums at a clip. I am unfamiliar with wells fargo & sharebuilder - I assume it is a DRIP type program & can't comment on its merits/problems.
2. Your portfolio using the Russell 1000 Growth and Russell 1000 value ETF's actually may not be doing what you want it to. While I'm no expert in this, combining the two essentially gives you a russell 2000 index, does it not? (maybe someone who knows these ETF's better than me can comment.)
If that's what you want to do, would it not make more sense to just put the whole sum into a broad stock index such as the s&p 500 or the russell 2000 ETF's?
I'm guessing that you were originally using a reccomended growth stock and value stock split using mutual funds, but then decided to go the ETF route due to lower expenses. It's not what I do, but no more reasonable or unreasonable than anyone else.
3. On that note, even though you have both growth and value components with these ETF's, I'm pretty sure that due to current indexing practices, you have the equivalent of a large blend fund. Is that what you wanted to own?
4. I am sure that you have researched the effects of using a small TIPS component to your portfolio using MPT (modern portfolio theory). I also do this, but am not happy with the result (particularly as I see no return while my eyes tell me there is real inflation due to energy prices in the market). I would not be suprised if we all get burned on this one, and once I've proven this to myself , I'll switch out of this asset class which is probably a loser.
Once again, same disclaimer I wrote earlier still applies.