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24 year old just starting retirement savings...
Old 04-21-2008, 11:05 PM   #1
Confused about dryer sheets
Join Date: Apr 2008
Location: Philadelphia, PA
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24 year old just starting retirement savings...

Hello everybody! My name is Anthony. I am 24 years old and from right outside of Philadelphia, PA. This seems like a really nice place to get some valuable information, and I thank everyone in advance for all of your help. I probably have a lot of questions to ask you about retirment, but I'll pose two to start.

I have recently got into all of this retirment stuff and it's fascinating. I don't make all that much money ($30k right out of college, I guess isn't terrible). I have maxed out my 2007 Roth IRA and already put about $1500 in for 2008. I decided to go with Vanguard Target 2050 Retirement Fund. My goal is not to retire early. I plan on living on long life (knock on wood) and plan on finding a career I love and working until I'm 68-72 years old. But, I'd like to attain as much as possible from my retirement accounts (currently don't have a 401k but I will start one as soon as I start my new job).

Two questions: 1. Is a target retirement account a good idea? I have heard that they are safe and very profitable (especially Vanguard) but I sense that it may not be aggressive enough.
2. Now I understand the concept of compound interest and how theoretically if I invest say $5,000 a year for the next 40 years I will have around 2 millionish. Does this theory change if I have several funds within my Roth IRA or does it benefit to stick with one, maybe two funds?

Thank you for your help! I really appreciate it!
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Old 04-22-2008, 07:06 AM   #2
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Welcome Anthony. You have made the most important step in financial independence - you have started early. Congratulations.

Being financially independent doesn't mean you have to retire, it just means that you can have more choices in your life. Who wants to work at a job that has quit being fun because you must?

A target fund, at Vanguard especially, is an excellent choice. When you start to invest outside of an IRA or 401(k) you may want to keep any bond investments from the taxable account, for tax reasons. For now a target fund is great place to start.
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Old 04-22-2008, 07:53 AM   #3
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A target fund might be the only fund you ever need. Or it might not. Depends on what you learn and how you do things.

Light travels faster than sound. That is why some people appear bright until you hear them speak. One person's stupidity is another person's job security.
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Old 04-23-2008, 07:03 AM   #4
Recycles dryer sheets
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Consider saving enough to give yourself choices later.

Ever start a marathon (or long term project) and decide partway through that due to an injury or other reason it just is not worth finishing the race/project?

Save enough to allow for early retirement options should your desires or circumstances change.

Chances are that after about 30 years of any job you will be ready for a rest from W*RK
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Old 04-23-2008, 07:52 AM   #5
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To answer your second question (I think?), the Target Retirement series is a sort of a "fund of funds", so, in effect, you have stocks, bonds, international, etc. within that fund.

Seems like, or studies show, that asset allocation (percentage of stocks vs. bonds) makes up the majority of return over the long term. It doesn't make sense to hold 10 funds if they all have basically the same stocks in them, does it?

I think that is the question your asking.

Good choice as far as Vanguard. That's what I've done. They have rock bottom expenses. Which has been shown to be another determining factor for good long term returns. Can't make as much if your fund company is charging you a 1% expense ratio vs. 0.25% (or about) on those Target Retirement funds. That extra 0.75% per year adds up over 40 years.

"There's those thinkin' more or less, less is more, but if less is more, how you keepin' score?
It means for every point you make, your level drops. Kinda like you're startin' from the top..." "Society" - Eddie Vedder
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Old 04-23-2008, 10:01 AM   #6
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1. Regarding how "aggressive" they are, the funds with the longer time horizon have a higher proportion in equities, which are considered more volatile investments. So the 2050 fund has more stock funds than the 2020 fund, which has shifted to less volatile (and typically lower returns) fixed income.

2. The theory of compound interest does not change if you add more funds, as long as the expected returns are the same. If you have a ton of retirement money in a low-yielding checking account, then you won't reap the benefits of compound interest getting .2%.

When conceptualizing how much you need for retirement ($2M), you should also remember what $2M in 2050 will be able to buy you. The answer: a lot less, depending on the magnitude of inflation. It's just something to keep in mind, even though it doesn't really affect any specifics to your plan this far out, when you are likely saving as much as you can to build up a cash reserve (3mo. living expense).

Go Phils!
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