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March 21, 2011

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Barebones Retirement: The Absolute Minimum

Hey guys, how’s it goin’?

This will be my first post dealing directly with investing.  Before we begin, keep in mind that I am not a professional investor.  I’m not licensed by the appropriate authorities and you take my advice at your own risk.  I will not give information on specific stocks.  This is going to be general “common knowledge” type stuff.

Now that the legalities are out of the way.

Are you saving for your retirement?  Why the heck not?  Can’t spare any money?  Check here and here for a strategy to do just that whether you think you can or not.  Already have a 401k through your company?  Good for you.  Willing to take the chance that it will be enough?  Don’t know where to begin?  I’ll tell you.

First things first.  Outside of a 401k through your employer, you basically have two options.  A Traditional IRA and a Roth IRA.  The Traditional IRAs is similar to your 401k because it’s tax deferred.  That means you put off paying taxes on the contributions until you withdraw it during retirement.  A Roth IRA is the opposite.  You make contributions AFTER taxes and then withdraw the money tax-free in retirement.  For more information on the different kinds of retirement accounts, see here and here.

You can get an IRA account through just about any bank, credit union, or brokerage.  Your bank has the resources on where to go.  When deciding who to go with, pay attention to trading fees and avoid companies that smell fly-by-night.

Which IRA should you go with?  The conventional wisdom is that you should have a Traditional IRA/401k AND a Roth account.  If you’re already contributing to a 401k through your employer, you only need to open up a Roth.  Why?  Tax reasons.  You won’t know the tax environment when you retire.  If you only have a Roth, you run the risk that tax rates are lower when you retire.  If you have just a Traditional IRA/401k, you run the risk of tax rates being higher when you retire.  Mixing it up gives you the flexibility to minimize how much you pay in taxes when you retire.  Since you aren’t retiring yet, I’ll get into it in another post.

Now you’ve got one, what do you do with it?  First, set up regular contributions.  Much like paying your bills and building up a foundation, arrange to have some money transferred to your IRA out of every paycheck.  Then, invest it in something.

Okay, I have to be careful for the next part.  What do you invest in?  If you don’t know much about the stock market, it’s not a good idea to start picking stocks willy-nilly.  As a beginner, stick with index funds.  These are funds that consist of most stocks in an exchange, so it tracks with that underlying exchange (DOW, S&P, Russell, etc.)  They have the advantage of really low maintenance fees, which makes a difference over the years.  The disadvantage is that you’re giving up on opportunities for better returns.  That being said, if you haven’t spent the time to figure out what your doing, picking stocks is a lot like playing the slot machine in a casino.  For more information on Index Funds, look here.

Just to be on the safe side, I won’t name any funds.  But you can easily do the research yourself.  The main criteria you want for whatever fund you choose is the expense ratio.  This is what the fund manager charges to maintain the holdings in the fund.  Since index funds don’t require active management, their expense ratios should be less than 1%.  You shouldn’t have any trouble finding something under the 0.5% range.

Before I wrap up, I should mention ETFs and Mutual Funds.  You’ll notice that most mutual funds have a higher buy-in.  Exchange Traded Funds don’t.  When you’re starting out, you may want to pay more attention to your ETF options and move it over to a mutual fund when you have enough saved up.  For more information on ETFs and Mutual Funds, look here.

I hope you found this information useful.  Good luck on you retirement planning.

Until next time, keep on saving.

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