Is it a good idea to do invest into mutual funds to build a Retirement plan?

Question

I am 25 and at my job I'm not offered any kind of 401k plan. Is it a good idea to invest into mutual funds to build my retirement plan? As they say, start early. What are my options on this?

I was refered by a friend to talk to a financial advisor, she is working p/t under primerica with three different investing companies. According to all the numbers I provided, she advises me to use Franklin Templeton Fund Allocation, I don't know much about any avaialble investing companies so I am very lost in terminology and the numbers.

Answer 1

I've been doing some research on this for a number of years, and here is what I have found . . . . Yes, mutual funds are a good idea for retirement planning. To better solidify one's retirement plan, though it is reccommeded that people make use of either a traditional or Roth IRA. (The difference between the two is in a Roth IRA, you pay taxes on your deposits. The traditional IRA's taxes are paid upon withdrawals. It would make more sense to open a Roth IRA, since you would be paying taxes at today's tax rates. There's no telling what the tax rate could be in 25-30+ years.)

Another area of investment is traditional stocks. Look for those paying out dividends. Stocks can be risky, like any other form of investment, but companies like Enron don't collaspe very often. (For all the Bush-haters, one of the good things he has done is pressure corporations into more stringent accounting practices and requiring that they give their employees some form of a retirement account. Failure to comply would result in a visit from a branch of the Justice Dept., say like the FBI. Of course the retirement requirement was just recently announced. So it may take a little time for that to take effect.)

If you use a financial institution, like a bank or credit union, then they should offer certificates of deposit (CD's). These are good investment vehicles, since you sign a contract for a brief period of time and yield a higher percentage rate than your traditional savings or checking accounts. The interest rate is usually determined by the term of the deposit, which can vary from a matter of days to some lasting as long as five years.

Money market accounts are also pretty good, because they offer a better return. Keep in mind, though that you would need a little more to open one of these types of accounts. Some financial centers require a minimum of $5 - 10K to open.

Annuities are pretty good, because upon retirement, your annuity pays you a "paycheck". It is a fixed income for however long you decide. Of course in order to get this income, you have to pay into it for several years. It can be good, though.

There are many other form of investing and saving for retirerment. My advice is decide what type of lifestyle you want to live presently and when you retire. If you think you will spend a lot like for travellling and spoiling grandchildren, then you will need to aggressively save during your working years.

Finally, get with somone you know and trust. Maybe you have an old college or high school classmate, friend, co-worker or family member. With all those people, it is possible that one of them is well versed in investing and retirement planning. Sit down for lunch one day and ask them to help plan your retirement savings. A word of caution though, some people are prohibited by law from discussing certain aspects of certain companies. (example: A systems architect from Microsoft couldn't discuss with the pros & cons of investing in Microsoft stock. It is a violation of SEC regulations . . . . . in case you didn't already know any of that.) Also, you could go to your bank or credit union and ask the teller or manager if they have an investment counselor on staff. That person could help you out. You let them know what you want out of retirement, how much you have to get started, and they can guide your path.

Answer 2

A Roth IRA is an excellent vehicle to start retirement savings. Your contributions are after tax, but the account will be taxfree going forward, including your withdrawal 40 years from now. An impressive and powerful vehicle. Maximum contribution are $3000/year. I would suggest a quality, value-oriented stock fund (for example, and example only, two of the funds I use are FAMVX and JMCVX), or possibly a balanced fund, which mix stocks, bonds, and cash. There are a lot of good balanced funds out there.

Open an account, and start an automatic monthly withdrawal from your bank account.

You can open a Roth, even if your company offers a 401k.

Since your company doesn't have a 401K, you can also start a traditional IRA. With a traditional IRA, your contributions are pre-tax, the accounts grow taxfree, but you will be taxed on withdrawal. Again that is 40 years from now.

If you can start putting 8-12% of your gross income away for retirement, you will be doing fine.

At the age of 25, don't neglect short-term accumulation needs. I would fully recommend that in addition to starting retirement savings, start putting money away in an emergency fund. Whether it is 3 months of expenses, or 6 months of expenses, or $10,000 or what, try to build this amount in a liquid account, say a money market or a money market fund. This is not vacation money, this is not buy a car money - this is a reserve that is inviolate unless you need it. And if you ever need it, you will be very glad you have it.

Once you have your retirement started, and your emergency reserve filled, then you have a wide range of additional accumulation options - whether it is vacation or car money, saving for a house, or just trying to improve your general lot in life.

I have run on far too long here.

Good luck and have fun. You are at just the right age to be starting.

Answer 3

Yes, starting early is a good idea. the little you put away now will reap massive returns over the long run. You always need to consider the tax effeciveness of an investment and the risk to reward ratio. In the very long term say 20+ years look for investments that have good, low volatility returns and have performed consistently well over at least 5 years. Dont be seduced by volatile, high return funds because losses can take many years to recover. But whatever you invest in, it has to always be outperforming bank interest as a minimum. I think your target return should be around 10% per year only varying +/- 3%. there is an argument that being young you can afford to take risks, but most people dont want to be putting more money into this kind of thing when the first one or two went horribly wrong

Answer 4

I am not an investment adviser but I've spent a lot of time planning my retirement.

There are tens of thousands of mutual funds and over 80% don't beat the market. My advice is to look into an Index Fund that only tries to match the market (thus beating 80% of the people who buy mutual funds). You have lots of time since you are only 25 and *over time* the index has average 10% to 12%. This is not sexy but the costs are very low and if history is any indication, is a proven way to plan for retirement.

Another part of my investment strategy was determining how much to invest each paycheck. I started out with a manageable amount like $25 (ideally, payroll deducted). Then each time I received a raise, half of my increase went to retirement and half was mine to spend. This is easier than it sounds and it is amazing what happens over time.

Good luck and stay with it.

Mike Honeycutt

Answer 5

I agree with Joe that starting out you will want to put your money in a diversified portfolio of mutual funds. That can be a few diversified funds or if you learn enough you can pick a number of different funds that result in being diversified. The former being the easier choice. I'm adding my two cents to say that your first choices are not locked in stone. Be protective and conservative at first. You can start out very generic and broad and then as you learn more about investing, if you chose, you make changes as time goes on. Even picking some of your own stocks if you like. But there would need to be a learning process first or get advice. Good Luck. PS, I do want to say in the next few years I don't favor bonds as I expect interest rates will go up lowering returns in the short term.

Answer 6

Your advisor is making commissions buy recommending Franklin Templeton. This is because FT is a "load fund." A load fund is a commissionable fund. You are better off investing in a no-load mutual fund instead of working through a broker. You can contact a no-load fund directly, like Vanguard, T Rowe Price, USAA, etc, and buy through them directly. That way you won't pay a commission.

Regarding the type of account, when you set up your account, you can choose between a Roth IRA and a Traditional IRA. Both have differing tax benefits. In any case, you could build a diversified portfolio with either fund company. Remember that the point of investing is to make money for YOU, not your adviser.

Answer 7

Yes, but start a Traditional IRA or a Roth IRA!

I use Scottrade for my IRAs because they have no extra fees and many mutual funds they offer are no load and no transaction fees.

I recommend starting both, but one at a time.

Use a Traditional IRA when you need a tax deduction this year.

Use a Roth IRA when you don't need a tax deducton this year.

If your company offers another retirement plan, look into it. 401Ks are not the only company sponsored retirement plans.

PS My best mutual fund has been based in real estate, UMREX, Excelisor Real Estate Fund.

Answer 8

Franklin Templeton group charges high fees either up front or back-loaded so forget that. You have to build equity exposure now so yes, buy funds but an advisor probably a bad idea. Go to Schwab.com & the like & see how easy it is to do. Going to start with Index funds (S&P 500, some world funds) or an ETF (trades like a stock such as EFA that has global exposure. Those "advisors" bleed you in ways you can't see in expensive funds. Have degree in Finace & been investing for myself & others for 26 yrs safely & cheaply. WIlling to answer any qs for free at [e-mail] Start now & start right.

Answer 9

Go for a Roth IRA or Mutual Fund first....once you are comfortable with your savings level vs. spendable income, then start buying savings bonds.

At your age, even $100 per month is going to get you started toward a nice retirement.

Once you make the decision, stick with it and don't waiver. Treat that income as "untouchable" as it is being socked away for a rainy day.

Answer 10

You can start an IRA at your local bank or with Fidelity Investments. It is best to start early but you should consult an investment professional to determine the best way for you to save for retirement.

Good luck!