Many younger college graduates work for companies that offer a 401 (k). But just as many do not work for a company that offers an employer-funded pension plan.
And that means if you're a younger employee, you need to start saving yourself for retirement.
This can be done using a traditional IRA, a Roth IRA and / or a taxable account or a combination of all three. However, experts generally assume that adults entering the workforce use a Roth IRA for retirement, but over time they should consider using all three types of accounts.
The Roth IRA is, in one sense, a traditional IRA: The money in your Roth IRA (including income and profits) grows tax-free. But the Roth IRA differs from a traditional IRA in two ways:
With a Roth IRA you donate dollars to the account after taxes; Roth IRA contributions are not deductible. In contrast, you may be able to receive a deduction from your individual income tax return for the amount you have contributed to your traditional IRA.
With a Roth IRA, if you meet the requirements, qualified payouts are tax-free. In contrast, distributions are taxed by a traditional IRA as normal income.
Why the Roth IRA? In general, it's about taxes. It is usually a good idea to use a Roth IRA if you are in a low tax bracket and expect to withdraw money from this account if you are in a higher tax bracket. In contrast, you can do the opposite – save with a traditional IRA – if you are now in a high tax bracket and expect to be retired in a lower tax bracket.
What are the best funds for the beginning?
Which fund or funds could you use if you are just starting?
We asked experts to share their tips.
Todd Rosenbluth, director of ETF and Mutual Fund Research at CFRA, recommends the Fidelity 500 Index – Investor Class (FUSEX) fund. The gross cost ratio is 0.09% and the minimum investment is $ 2,500. "It's based on the S & P 500 Index, which consistently outperformed most active equity funds," says Rosenbluth.
Jim Lowell, Adviser Investments' Chief Investment Officer and Editor-in-Chief of Fidelity Investor and Fidelity Sector Investor Newsletters, recommends Fidelity Low-Priced Stock (FLPSX).
According to Lowell, the fund manager, Joel Tillinghast, developed and introduced this unique approach as early as 1989 – he has delivered three times his benchmark in terms of total return – and always with less risk and more global focus. "Joel is usually early in times of coercion, but also among the first market participants," says Lowell. "Joel and this fund have seen many different investment environments – both at home and worldwide."
Lowell also notes that Tillinghast has always led FLPSX as a truly global fund; Established foreign market investment accounts for 34% of its holdings. "He's always focusing on real things that consumers are buying instead of the dreams that shoppers might bring to them," says Lowell.
Main sectors: consumer discretionary (26%), information technology (19%) and financials (12%). Top positions include UnitedHealth Group (UNH), Seagate Technology (STX), Ross Stores (ROST), Best Buy (BBY) and Next (NXGPF).
Daniel Wiener, chairman of Adviser Investments and co-editor of The Independent Adviser for Vanguard Investors, recommends younger investors buy PRIMECAP Odyssey Growth (POGRX) and "just add as much money as they can – within the guidelines for IRAs sure."
Why this fund? Wiener offers the following reasons: growth at a reasonable price strategy; Focus on Health and Technology – two sectors he believes have the best potential for long-term growth; not focused on income, so for a taxable account, it is tax efficient; Team of managers means that when a manager is hit by a bus, he does not break the thesis; all managers have at least $ 500,000 and most have more than $ 1 million of their own money in the fund; long-term focus stick to her knitting; and, oh yes, and the performance of this team was outstanding.
The average total return of the fund over the past 10 years was 13.27% per annum. In contrast, the S & P 500 has risen by an average of 9.49% per year.
"Our advice would be to invest in an age-matched fund with target date," says Grant Verhaeghe, senior director at Captrust Financial Advisors. "Initially, we would focus on controlling costs through a passive fund, and we would also recommend that (young workers) reassess as assets grow and they better the nuances of each target date series, such as active versus passive understanding how to use additional diversifying asset classes and how aggressive / conservative the glide path is. "
Note that, for example, Target Date Funds (TDFs) change their asset allocation and risk stance over time based on a target retirement date.
David Cohne of the Cohne Investment Group is also one of those who like TDFs, in particular the Fidelity Freedom Index 2060 fund, which has an initial minimum investment of $ 2,500. "Many mutual funds have this minimum, so it will be difficult for (20-year-olds) to carry out multi-fund asset allocations until their portfolio gets a little bigger," he says.
Other consultants also recommend Target Date and Target Risk funds. "Perhaps the best option for (young) workers is to invest their contributions in a life cycle or similar life stages or target risk funds," says Louis Conrad II, President of Compass Wealth Management. "Such funds are indeed a fund of funds that invests in multiple areas of equity and bond markets to provide a diversified all-in-one fund."
A few of the better ways to Conrad:
- Personal Strategy Growth Rowe Price (TRSGX). This fund currently offers a targeted asset allocation of around 77% equities and 23% bonds / cash / others. About 38% are foreign. As readers get older, they may want to switch to a more conservative version, such as T. Rowe Price's Personal Strategy Balanced (TRPBX).
- Rowe Price retired 2060 (TRRLX). This fund will automatically allocate its asset allocation over time to become more conservative as the investor ages. Such a fund does not require a realignment, and this one fund can meet the needs of an investor throughout its life.
Vanguard LifeStrategy Growth Investor (VASGX). Similar to T. Rowe Price's Personal Strategy Growth, the Vanguard offering has a current allocation of 78% in equities and 22% bonds / cash / others. About 39% are foreign.
Conrad also loves the Vanguard Target Retirement 2060 (VTTSX). Similar to T. Rowe Price Retirement 2060, Conrad says that this Vanguard fund will automatically adjust its allocation over time to suit the investor's declining investment horizon.
Notably, the fund families most notable for lower-cost, index-based TDFs are Vanguard and Blackrock, the latter offering the LifePath Index 2060 Fund.
Christine Benz, Head of Morningstar's Personal Finance Department, referred us to an article about seed money from Morningstar.com. Benz, for her part, finds "Schwab so easy to recommend to people who are just starting out because the index funds have no minimum, and they are also very cheap."
Consider: Schwab Total Stock Market Index (SWTSX) (initial investment: none, expense ratio: 0.03%) and Schwab US Broad Market ETF (SCHB) (no minimum, cost ratio: 0.03%).
It's never too early – or too late – to start planning and saving for retirement. To build the retirement plan for the future you deserve, check out the new premium newsletter from Robert Powell, Retirement Daily. Do you have questions about money, retirement and / or investments? E-mail directly to Robert.Powell@TheStreet.com.