A reader named KC recently wrote in with a question about investing for retirement:
I’m 28 years old with a wife and a six month old baby. We’ve always been money-conscious, but would really like to focus our efforts. We both have Roth IRAs, but are not satisfied with them. They are heavily loaded, and we weren’t that familiar with them when we were advised to set them up. My question is where you would recommend I go for a long-term investing vehicle? I always hear to go with no-load mutual funds but would like your opinion.
This is a great question. I’ve said it before, and I’ll say it again… Friends don’t let friends pay mutual fund sales loads.
My personal preference when it comes to long-term investing centers is low-cost, no-load mutual funds. When I say low cost, what I’m really talking about is “passively-managed” index funds that seek to match the market as a whole, or some segment thereof.
Now the question is where you go to find low-cost index funds. Here you have three general options:
- Mutual fund company
- Discount Broker
- Automated Investment Service (a.k.a. robo advisors)
Let’s take a look at all three and the pros and cons of each.
Mutual Fund Companies
As for my favorite places to invest, Vanguard is at the top of my list. We also have some money with Fidelity and have been quite happy with their offerings. A third option would be Schwab, who has a bunch of low-cost mutual funds with a low minimum investment of $100.
It’s important to understand that not all mutual fund companies are created equal. Vanguard, for example, specializes in index funds. It also has three tools to make investing easy:
- Target Retirement Funds: Simply pick the fund that corresponds with the year you plan to retire (e.g., Target Retirement 2060), and Vanguard takes care of the rest. It allocations your investments between stock and bond index funds. And as you near retirement, it shifts more of your money toward safer bonds.
- Lifestyle Funds: These are similar to Target Retirement Funds in that Vanguard handles the allocation of your money and rebalances your account. Rather than picking a fund based on when you plan to retire, however, you’ll pick one based on the allocation you want between stocks and bonds (e.g., 80/20). This allocation does not change unless you change it.
- Vanguard Personal Advisor Service: For a fee of 30 basis points (0.30%), Vanguard will manage your investments for you. For those looking for hands-on advice, it’s one of the best deals out there. You do need a minimum of $50, 000 to invest, so this service may be more suitable for those converting a 401k to an IRA.
Fidelity offers similar retirement fund options, although not all mutual fund companies do.
Discount Brokers
A second option is to open an IRA at a good discount broker. This approach is ideal for those that want to invest in individual stocks or ETFs. The major mutual fund companies do offer brokerage services, but they generally don’t compare to the online brokers who specialize in this service. Here are a few of our favorite options:
- OptionsHouse
- TradeKing
Robo Advisor
Finally, robo advisors have become an excellent way to invest in both taxable and retirement accounts. These low-cost services make investing easy. They help you select a portfolio that meets your needs. They then automatically rebalance your investments.
These services offer IRA accounts. Two of my favorite options are Betterment and Wealthfront.
Of course, there are other options to consider, such as opening a Treasury Direct account so you can buy Treasury securities such as T-Bills, T-Notes, T-Bonds, Series EE Savings Bonds, Series I Savings Bonds, etc. This will allow you to purchase these securities direct from the Federal government with no middleman.
Just keep in mind that the optimal composition of your portfolio depends on many factors, so you really need to give a lot of thought to your time horizon, risk tolerance, etc. before you make any major moves.
Every time you turn around these days it seems like everyone is talking about investing in gold for your retirement. I don’t want to be a dummy, I want to make some money for my retirement. My wife and I found a place on Facebook that caught our attention. It was a fellow named Oswald Pelaez. We looked up his web-site ozsgold.com. Well low and behold the site stated that Mr. OZ will guarantee any investments in his ventures into the gold markets. It seems very appealing to us to invest in such a company with guaranteed investments. You sure can’t get that in the stock market now can you. My wife seems very skeptical about trusting our retirement funds with Mr Oswald Pelaez. She doesn’t see how anyone can make such claims much less tell you that he will guarantee our future.
After stepping back a little and giving it some thought for a while, we concluded that Mr OZ is just full of “HOG WASH”. Who the hell does he think he is? He must think that the public are just a bunch of morons. The nerve of some people! The more I thought about it the madder I got. Hell, I could chew-up nails and spit-out tacks by the time my wife got me settled down.
Please, Please, Please warn everyone about about ozsgold.com and Mr. OZ, That SOB has to be a crook or just plume loco. Maybe another Bernie Madoff, who the hell knows? It just ain’t right.
Thanks, Jack
I use Fidelity and have been pleased with them. I also have ING savings, and for a couple years had some mutual funds through ING as well. Ultimately I did not like ING for mutual funds, though, as they were not as transparent as Fidelity with regard to performance and fees of their funds.
Above, Dean says Fidelity was slower with moves and withdrawal than Vanguard. Are there any other reasons people find Vanguard to be better than Fidelity?
Having dealt with both Vanguard and Fidelity (not any longer) I can highly recommend Vanguard. While initially impressed with Fidelity’s offerings and rates I was more than upset with them when it took an inordinate amount of time to both “move” and withdraw funds. Fidelity’s very slow (and seemingly intentional) slow-rolling cost me several thousands of dollars in just a few days. I will never do business with Fidelity again.
I’ll second the vote for Vanguard as well.
I think it’s worth it to save up in something like an ING Direct Orange Savings account until you reach Vanguard’s minimum. You can start out with the Vanguard STAR Fund at $1,000 (not my favorite but it’s the only low minimum option). Once you hit $3,000 you can go to a target retirement date fund. After that, you can start splitting it between other funds for better diversification. I created a calculator to help specifically with that:
http://www.providentplan.com/508/how-to-invest-for-retirement-a-diversified-investment-portfolio/
Hope it’s OK to share that link, but I think it’s a useful tool for anyone who wants to invest in a diversified portfolio at Vanguard.
I’ll second the 1st vote for Vanguard.
But, T. Rowe Price is also a good management company. I heard that they were founded on the principle of being the low minimum version of Vanguard. You can open an account there with something like $25 as long as you set up an automatic payment plan, versus Vanguard’s $1000, $3000, $10000 minimum structure.