Hi, I am Chase and 20 years old.

[Chase]

Hi guys,
First time poster here. I have been browsing the forums. I stumbled upon this site researching some other thigns. Part of my New Years resolution is to start a retirement account. I figured I will start this out by posting my situation and hearing some feedback.

I am 20 years old and make roughly $36k/year.
My employer doesn't offer any 401k, only a pension which is fully vested after 5 years. (I have been there 2.5.)
I still live at home and am going to college part time - just taking basic general requirements as I have no idea what and want to do and any particular interest in anything.
My only expenses are:
Car payment: $279/month.
Phone: $50/month
Gas: $150/month.
Misc: $100/month.
Car Insurance: $2000/year.

With that being said, I still have a good amount left over each month. My plan has been to start a Roth IRA and max it out. With the leftover money, I'm thinking of opening an online savings account (ING, Emigrant, HSBC) which all have rates of 3.75-4.25% - not sure which one I want to go with yet on features vs. yield. This account I would like to save a money for car/house. My current car is leased and is due to be returned in August. At that time, I am planning on buying a used car and paying cash. Other than that purchase, I would like to save the rest of the money for a house.

Between my reguar savings and checking account at my local bank, I have about $10k saved up at the moment.

I have just finished reading Investing for Dummies and picked up A Random Walk Down Wall Street last night.

Any ideas/suggestions/etc. would be greatly appreciated.

 

[Howard]

Your thinking is on the right path, maybe you have a friend or relative who is particularly successful who would share some thoughts or put you in touch with a reliable FA?

Most important,w hen you eventually find a life partner, make sure your ideas are in sync, a Saver and a Spender are not a good combination.

 

[Nords]

Welcome to the board, Chase. You're off to a good start, especially with the investing reading.

Most of this board would recommend against a financial salesman advisor. Even friend's & relative's advice depends on your definition of "successful".

With the reading you've done this far, you might want to add Bernstein's "Four Pillars" and develop your asset allocation. More info is on his website . Meanwhile you can set up your Roth and keep socking it away for your first home.

I know it's tough to find cheap insurance when you're younger than 25 but $2000 year... yikes. Does your company offer discounts for good students or driver training? Do you have any military experience or relatives with same who'd qualify you for USAA? Is your next car going to be a beater that won't require collision or comprehensive insurance, or at least with high deductibles?

 

[Chase]

Hi guys,

Thanks for all the advice and pointers. I will check out the reading you recommended as well. I hear ya on the insurance. The problem is the car is a 2004 and I am still on parents insurance, where they have a low deductible. I can't even imagine what it'd be in my name. I will check with the company for any additional discounts I may be able to recieve. No military experience in the family either. For my next vehicle, I want something cheap, but not so cheap to where it is unreliable. I'm not sure exactly what I'm going to get yet. I'm thinking a used base model s10 --- still undecided. I would just like to have no car payment so that would be an additional $300/month I could save.

 

[Helen]

Hi Chris !

Wow, you are going great - and you are only 20 !!! You may want to check out Vanguard, it's hard to go wrong with their low cost mutual funds.

Here is another excellent board to check out:

http://socialize.morningstar.com/NewSocialize/asp/AllConv.asp?forumId=F100000015

It's the Vanguard diehard forum, they have a lot of excellent advice on asset allocation.

As for cars, have you driven a Honda Civic yet ? I had 170K miles on mine with no major problems until I was rear ended and shoved into a SUV ... It still had the original clutch !!! I think I paid $11k for it new and the insurance company paid me $2,400 for it.

Best regards,

-helen

 

[Chase]

Hey Helen,

Thanks for the other forum. I was planning on opening my Roth with either Vanguard or Fidelity. As for the Civic, I would like to have one as I know how dependable they are, however, I don't think I would be able to while I still live at home. My dad works for an American car company and doesn't think too highly of imports...LOL. Thanks again.

 

[MooreBonds]

Welcome Chase

Just in case you aren't aware....you can open up a ROTH for the 2005 tax year up until April 15, 2006 (and possibly later if you file an extension...but check the IRS website first), AND fund it at the same time for the 2006 tax year. So, if you have the cash, why not fund it for 2005 and 2006 at the same time and gain an early lead on your 2006 tax-free compounding?

One thing to remember - since your ROTH will be tax-free until the greedy politicians go back on their promises yet again forever, you want this to be your most conservative account (i.e. take as little risk). Better to have your losses in your taxable account where you can write it off (or, 2nd best, in a tax-deferred account, since you will ultimately pay less taxes on your lower withdrawals if you lose money) versus losing money in your ROTH and losing that tax-free money forever.

Also Chase, I'd strongly recommend looking at opening up a Health Savings Account. You can get a tax write-off while at the same time build up additional tax-free compounding. And, assuming you're a typical indescrutible healthy 20-year old, a high deductible health plan should be cheap. I just signed up with assuranthealth.com (Healthlink OAII), which offers a discount if you renew with them. Something to suggest to your parents as well.

One other thing - are you simply going to college because "it's expected", or are you planning on leverging your degree? Does your employer offer any reimbursement for educational expenses?

-Peter

 

[Nords]

since your ROTH will be tax-free forever, you want this to be your most conservative account (i.e. take as little risk).  Better to have your losses in your taxable account where you can write it off (or, 2nd best, in a tax-deferred account, since you will ultimately pay less taxes on your lower withdrawals if you lose money) versus losing money in your ROTH and losing that tax-free money forever.

Hunh. I would have suggested an asset that's out at the high end of the risk/reward curve... like and index fund of microcaps or small-cap value stocks.

Nothing worse than an IRA in money markets or CDs. Unless, of course, that's your intended asset allocation.

 

[Chase]

Hi again,

Peter, I remember reading about being able to fund for the current year until April 15th. I'm not sure yet if I am just going to fund the whole thing at once or just have automatic deposits setup monthly. Also, on the college thing, pretty much because "its expected." I can't say I have an interested in anything particular...I have taken all those Meyer-Briggs personality tests and feel like they results are from a stranger...LOL. I believe my employer does reimburse, but my dads company is still paying at the moment. If/when they decide to not pay anymore, I will check with mine.

BTW, I have heard some advertisments for "HSA accounts," but what exactly are they? Money to put towards any medical expenses I assume? I will check into that.

Thanks again,
Chase

 

[SteveR]

Hunh.  I would have suggested an asset that's out at the high end of the risk/reward curve... like and index fund of microcaps or small-cap value stocks. 

Nothing worse than an IRA in money markets or CDs.  Unless, of course, that's your intended asset allocation.

I agree with Nords put things in your tax deferred accounts that will grow over time so you can get greater relative gains on the growth, especially at your age when you should be going aggressive since you have such a long horizon. Some of us older farts folks will move some money into more conservative investments because our investments will be needed much sooner so we don't want too much volatility.

 

[dunc0029]

BTW, I have heard some advertisments for "HSA accounts," but what exactly are they? Money to put towards any medical expenses I assume? I will check into that.

You are right on about HSAs, with the added benefit that you can use the account for ANY purpose after age 65 ( not just healthcare ).  The "catch" is you have to have a high-deductible health plan to pair the account with.  I worked for a company that administered HSA/HRA/MSA/VEBA accounts.  You should be able to Google HSA and get tons of info ( or search this forum ).

 

[Chase]

Thanks again for all the further advice.

I will check into those HSA accounts, but I'm not sure if I would qualify. My insurance is pretty good as I rarely have to pay anything besides my $2 copay for prescriptions.

 

[MooreBonds]

Thanks again for all the further advice.

I will check into those HSA accounts, but I'm not sure if I would qualify. My insurance is pretty good as I rarely have to pay anything besides my $2 copay for prescriptions.

About HSA accounts - the goal is to get a very cheap high-deductible policy if you're healthy and don't anticipate many medical expenses, and take the leftover money that you used to pay to the health insurance company and put it in your HSA. That way, you let the cash accumulate in your HSA account over time and come out ahead, instead of your insurance company. Why pay for expensive health insurance plans if you are never sick?

Rethinking my comment about the ROTH IRA - perhaps the comments about putting it in higher-risk investments have valid points...I suppose my goals of just averaging 7.5%-8%/year in all of my accounts given my current financial position, my conservative nature, and some painful losses in equities that I've been writing off for several years and will continue to do so wisdom of the sages has prompted me to take my risks in my taxable account and some in my tax-deferred, and left my ROTH for relative safety.

--Peter

 

[Jeb-NY]

This suggestion is probably obvious to the old pros on the board but maybe not Chase. I was sitting on two years worth of Roth contributions (2004 and 2005) and April 15th was coming up. I was sitting on it because I didn't want to put any more in the tech fund that I had earlier contributions and could not find a fund I liked. I ended up opening a TD Waterhouse account and dumping it in a Money Market. From there I can buy an assortment of funds or stocks as I find something that I like all in the Roth. I will probably sell the tech fund and roll that in to the same MM.

Jeb

 

[Chase]

From the books I have read so far, they seem to suggest taking more risk while you are younger (have more time to recover if something should happen.) Then, switching to more bonds/less risk as you get older? Also, my insurance is through work and is very good --- they only take $7/week out of my check for it, so I don't think an HSA is something I would be interested in right now.

 

[MooreBonds]

From the books I have read so far, they seem to suggest taking more risk while you are younger (have more time to recover if something should happen.) Then, switching to more bonds/less risk as you get older? Also, my insurance is through work and is very good --- they only take $7/week out of my check for it, so I don't think an HSA is something I would be interested in right now.

Well, I've never been one to quite fit to 'conventional' defintions/standards. The way I look at it, since I'm well on my way to being FIREd, I'm not going to shoot for Pluto with my solid-state rocket fuel and risk having a stray asteroid wipe me out, when just going to the moon will suit my needs just fine. So, my 'boring', relatively less-volatile mix of fixed-income with some equity thrown in will definitely get me there with a psychologically greater certainty (I know there is more risk involved in having my high percentage of fixed income than first meets the eye, but I've always been relatively risk-averse).

As for your health insurance, it is a good observation of yours that you only pay $7/week for your coverage. But two things to consider:

1) Don't overlook the 'maximum out of pocket'. With some policies, you have a small $250 deductible with $20 co-pays...but if you get sick, you have to pay a certain percentage (often 20%, but sometimes more depending on the policy) of a higher total of expenses. If you're young and healthy, the only time you're likely to be in the hospital is if there's a serious accident..which would have a hospital bill in the several thousands. Your net out of pocket with the 20% co-insurance could end up being more expensive than with, say, a $2,600 HSA policy where you pay nothing (in network) above your deductible.

2) Also, don't forget - your employer could be subsidizing your insurance, and may be paying a certain amount and asking you to contribute $7/week...when it comes to benefits, always think of ways to not only save yourself money, but your employer as well.

For instance, things such as having your employer pay for your cell phone, vehicle, gas, car maintenance, etc., not only saves you the income taxes and your 7.65% Medicare/SS taxes, but also saves your employer 7.65% in matching SS/Medicare taxes. So you both win - and you're a happier, more productive employee.

--Peter

 

[TomSimpsonAZ]

Hi Chase, where do you live?

 

[justin]

Chase,

I'm 25 and pretty much 100% equities right now. I figure I can postpone FIRE a few years if market returns are poor. If market returns are better than I expect, I can retire a few years earlier. I realized that "setting a date" for FIRE is idealistic, but there are so many factors that will influence that date, that it is unrealistic (for me at least).

If you can live with losing a big chunk of your portfolio in a market downswing, then put most of your money in equities.

 

[Chase]

Hi Chase, where do you live?

Hi Tom,
I live in SE Michigan.

 

[TomSimpsonAZ]

Hi Tom,
I live in SE Michigan.

That seems like a decent area to get a good first home for cheap and have a roommate to cover the bills. As long as it is a trouble free home and you'd be paying rent anyways, consider it an investment, pay it down as much as you can while you're at the stage in life where you can have roommates...lots of them!

 

[Chase]

Hey Tom,
I hear ya. I believe my area is in a little bit of a bubble. Housing prices are slowing down and unemployment is up to around 8%. Houses here are somewhat expensive (to me, anyways) because of all the demand from the auto workers. On the room mate thing, I'm kind of picky, LOL. I'd rather stay at home for the time being and save up cash for a down payment so I can have a place all to myself.

 

[TomSimpsonAZ]

Hey Tom,
I hear ya. I believe my area is in a little bit of a bubble. Housing prices are slowing down and unemployment is up to around 8%. Houses here are somewhat expensive (to me, anyways) because of all the demand from the auto workers. On the room mate thing, I'm kind of picky, LOL. I'd rather stay at home for the time being and save up cash for a down payment so I can have a place all to myself.

I totally understand, finding a roommate that you can deal with is tough. I do think having roommates prepares you for a lot of things in life though. You learn to have a bit more tolerance(or you don't learn and YOU are the ******* roommate haha) and get to see how others do things.

Your loud obnoxious roommate teaches you to sleep through the garbage truck going by
Your talkative roommate teaches you how to ignore your future wife during a football game(j/k...sorta)
Your messy roommate prepares you for children

etc etc