Last week, I questioned when we should start saving for retirement. I got a lot of great advice from readers (thanks!). After talking it through and doing our own research, we’ve made the decision that the sooner we start, the better — even if we can’t afford to make huge contributions at first.
Neither of us receives a company matched retirement plan, so we made the decision to put all of our retirement savings into a Roth IRA for now. We’re in a very low tax bracket now, and tax brackets are only going to go up. With a Roth IRA we can pay very low taxes on the money now, and then withdraw it later tax-free. Someday we may have the opportunity to get company matches, and if that happens we’ll start contributing to a 401K up to the match.
We only have about 3 months worth of expenses in our emergency fund. We didn’t want to raid our savings for an initial investment, so we looked for an investment firm that didn’t require a minimum investment.
Our main priorities are student loan repayment and liquid savings right now, so we can only afford $100 a month toward retirement or $50 for each of our accounts. We’ll increase that amount later as our income increases and our debt decreases.
After looking at several investment companies, we determined that T. Rowe Price is the best fit for us. The initial investment is $1,000 unless you opt for an automatic savings plan of $50 a month. Perfect.
Tony brought up a good point that I hadn’t considered. “Will we be able to stop contributing on the automatic plan if our financial situation changes?” I wasn’t sure if participating in the automatic plan without a minimum investment would require a time commitment for automatic investment.
Before we opened the account, I called customer service with a list of questions. They were very helpful, which only cemented my decision to go with T. Rowe Price. The answer to Tony’s question is yes, we can temporarily stop contributing. If we haven’t made a contribution for several months and our account balance is still under $1,000, they will ask that we bring the total up to $1,000 or close the account. But once our account balance reaches $1,000, we can contribute as much as we want whenever we want.
It will take us about a year and a half to reach $1,000. We decided that we could afford to make room for $100 a month at least until that point.
Because we have so much time until retirement and with stock prices where they are, we decided to invest predominantly in stocks.
T. Rowe Price offers a convenient option for beginning investors. You can select a diversified retirement fund based on the time you have until retirement. If you have a lot of time, the fund is more aggressive with a greater percentage of stocks. As our retirement year draws near, the investment portfolio will gradually become more conservative. The fund we selected is about 90% stocks with a very diverse portfolio and only 10% bonds.
Because we’re beginners, we decided to go with this option. In a few years when we have more knowledge and more money to invest, we can easily move our money to different funds if we choose. For now, this is a safe bet for us.
I’m feeling really good about our decision. Yes, that $100 would be helpful toward debt or liquid savings, but it will get a much greater return in a retirement account for the next 40 years. Starting now will increase our chances of reaching our retirement goals, and more importantly will get us into the habit of investing for retirement.
If you’ve been thinking about doing this for yourself, I strongly urge you to start researching now. I think you’ll be surprised at how easy it really is.