I have a question about a 22-year-old recent college graduate who was fortunate to secure a job before graduation. Can you suggest a retirement investment? With the long investment horizon, I assume a Roth IRA would be best? Is there a particular product that allows monthly investments of $50 - $100 and has low fees? Do you have an opinion on ING Direct IRAs? Thank you!
MommaC - Roseville, CA
A: Building great saving habits early in the work career is a solid way to reduce your reliance on market performance and timing. Generally speaking, a 22-year-old would benefit the most from utilizing a standard IRA rather than a Roth IRA. With the typical
22-year-old, tax deductions are few and far between. With a traditional IRA, contributions are often tax-deductible, all transactions and earnings within the IRA have no tax impact, and withdrawals at retirement are taxed as income (except for those portions of the withdrawal corresponding to contributions that were not deducted.) A Roth IRA however, is funded with post tax dollars and qualified withdrawals aren't taxed. Essentially a Roth IRA allows you to hedge your tax exposure during retirement.
Dollar cost investing - often referred to as Dollar Cost Averaging (DCA) is an investment strategy whereas an individual would invest equal monetary amounts regularly and periodically over specific time periods (such as $50 - $100 every month for a year) in a particular investment or portfolio. By doing so, more shares are purchased when prices are low and fewer shares are purchased when prices are high. The objective of this strategy is to lower the total average cost per share of the investment(s), in theory giving a lower overall cost for the shares purchased over time.
There are a magnitude of online companies that have low expenses and an easy to follow account opening process. The first stop, however, should be with the recent graduate's employer. Assuming employment seasoning requirements are met, the employer may have a qualified investment plan currently in place.