Friday, May 09, 2008

A Plan of Action for Someone Who Has No Retirement Savings

I sent this e-mail to a friend I'm trying to convince to open an IRA. He knows it's a good thing to do, but he doesn't know where to start. So I outlined one possible path for him and thought I'd reprint here for a wider audience.

Dear Friend who Doesn't Have an IRA Yet but has $1,000 to Get Started,

First, go to Vanguard:

Then open a Roth IRA (you can apply online):

More info on what a Roth IRA is:

An IRA is just a container for the money. Once your money is in there, you then select a fund to invest your money in. Most of the Vanguard funds you'd want to buy require a minimum of $3,000 -- except for the Vanguard STAR Fund (VGSTX.) VGSTX is what I recommend you buy into at the start. It requires a $1,000 minimum for your first purchase, and then additional investments have to be at least $100.

More info:

So once you have $1000 handy, go ahead and open your Vanguard Roth IRA and buy VGSTX. What's great about this, is you can set up automatic investments, so once a month you buy into the STAR fund with at least $100. The more automated you can make your purchases the more likely you will stick with it.

More info here:

I would suggest you continue buying into the STAR fund (VGSTX) until you have enough to "exchange" about $3,000 worth for another fund. You should do some research on index funds so that you're comfortable knowing what they are, but basically Vanguard has the lowest expense ratios (fees) for index funds and offers highly respected choices.

Vanguard funds I invest in:

  • Vanguard Total Stock Market Index Fund Investor Shares (VTSMX)
  • Vanguard Total International Stock Index Fund (VGTSX)
  • Vanguard 500 Index Fund Investor Shares (VFINX)
  • Vanguard REIT Index Fund Investor Shares (VGSIX)
If I were you, my strategy would be to buy into the Vanguard STAR Fund (VGSTX) at regular intervals until you have at least $4,000. Then use the Vanguard tools to exchange shares for one of the index funds I mentioned. I would start with the total stock market index fund (VTSMX), the first one in the list. Then I would buy the total international stock index fund (VGTSX), the next one on the list. The important thing is that you buy a few different funds to cover all your bases. That's diversification in a nutshell. It will take awhile to get enough money to buy into these funds, but you have to start somewhere.

How much does it cost?
$20 per year for EACH Vanguard fund account with a balance under $10,000. This fee does not apply if you sign up for account access on and choose electronic delivery of statements, confirmations, fund reports, and prospectuses.

How do I get money into my Roth IRA?
You can do an electronic bank transfer by providing your checking account number and routing number. Or you can mail a check.

Long-term strategy:
I would pick some or all of the index funds from the list I made above and decide how I wanted to split up all of the money in the long-term and work towards that. There are usually transaction fees to sell or buy into funds, but one of the great things about going through Vanguard for Vanguard funds, most of those fees are waived. So to recap, my suggestion for you is:

  1. Take your $1,000 and open a Roth IRA and buy into the STAR fund (VGSTX).
  2. Make automatic monthly investments of at least $100 until you reach $4000.
  3. Exchange about $3,000 worth of the VGSTX funds and buy into the total stock market index (VTSMX).
  4. Then start saving in the STAR fund again until you have another $4000, at which point you exchange $3,000 worth of the STAR fund and buy VGTSX.
That should keep you busy for awhile.

I have to add a disclaimer. I'm not a financial professional. These are just some things that have worked for me, but you should really do your own research and make your own decisions. The important thing is that you start saving for retirement as soon as possible -- even if you can't save much. $100 a month would be a great start. After awhile, you can gradually increase the amount.

Good luck!

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