Very new to this, need help!

dancinxqueen324 · April 2014

Hi ladies! My husband and I are both freelancers living in NYC, so we don't have normal salaries and the cost of living is super high. With that said, we are finally looking into starting some sort of retirement fund through our bank. I know NOTHING about finances so I figured we would go talk to someone there to figure out our best course of action. My question is, how do you pick what type of fund your money goes into? Some are higher risk than others? And would the banker take advantage or steer us in the wrong direction to benefit themselves in any way? Again, we are extremely new to this and our parents all had 401K's through work, so they don't know much about what we're doing either. Any advice would be much appreciated, thanks!

hoffse · April 2014

This is a really loaded question. So I'm probably going to end up writing an essay. Apologies in advance

You can go through a variety of banks - but I personally use Fidelity, which is an investment bank. Vanguard, Schwab, Scottrade, etc. are also investment banks. I use Fidelity primarily because there's a branch nearby, and I have the Fidelity credit card, which deposits money into my retirement account as rewards. The other investment banks are great too. I'm particularly impressed with Vanguard's funds, and I might open a separate brokerage account there when we want to start investing cash to build wealth down the road. I prefer to use an investment bank instead of a regular bank because investing is what they do all day, every day. You're not going to be able to get a mortgage at Fidelity...

As for what my money goes into, I use mutual funds that are primarily stock-based. Mutual funds are exactly what they sound like. You contribute money, I contribute money, and others contribute money, and an investment banker pools our money to buy a bunch of stocks. Hence the name. The idea is that you are automatically diversified, and you also have access to stocks that might cost more to buy than you'd normally pay for on your own (since your money is being pooled with other people's). You can think of the mutual fund as being a giant basket, with the individual stocks filling that basket. The basket can be filled with all sorts of things. For instance, I have a biotech fund that is filled with stock from various biotech companies. Funds can also be filled with bonds, which are lower risk (but also have a lower return) and other things as well.

The reason I do stock funds is because they tend to be riskier than bond funds. Generally, the riskier the fund, the greater the return. Of course, you're a lot more likely to LOSE money in the risky funds too, and your risk tolerance is something you'll have to figure out as you go. I have a pretty high tolerance for risk. I just trust the market to right itself (it always has so far), and I'm young enough that I can wait out any losses I have along the way. Others don't tolerate risk as well. Neither approach is "right" - you just have to figure out where you fall on the risk tolerance scale.

Even though stock funds are riskier than bond funds, stock funds are not nearly as risky as buying stock directly. I won't ever buy stock directly because when you lose, you tend to lose REALLY big. When your money is in a mutual fund, one really bad day for any given stock might not be so bad for the fund overall - because other stocks might do fine that day and counterbalance the crappy stock.

So for me, stock funds are a nice compromise between being too safe and having slow growth, versus feeling like I'm really gambling when buying stock directly.

As for fees, if you go through an investment bank, typically the fund will take a very small percent of earnings as the fee. I simply don't invest in funds that have more than a 1% fee because I'm cheap.

Something else I look at is the 3-year, 5-year, and the 10-year performance charts. Keep in mind any 10-year charts you look at will encompass 2008. I want to see that the fund righted itself and then has substantially exceeded pre-2008 levels before I put money into it. I will not buy a fund if it has lower than a 10% return over the last 10 years. This strategy means I miss out on "hot" new funds, but I also have assurance that the fund I'm buying can withstand a bad market.

Finally, I always check to see how long the fund manager has been managing the fund. I won't buy a fund if it's changed managers in the last 5 years. Again, that's because I can look at the growth chart and feel pretty good about the current person's ability to manage the fund profitably.

You can use morningstar.com to find all of this info on various funds. They lay it out for you on a big chart, organized by fund. It's super easy to compare funds that way. They also give a rating to each fund. I only buy 4 or 5 star-rated funds.

When you're just getting started, I would probably buy something called an index fund. This is a fund made up of a group of stocks that - when put together - take the "temperature" of the market. Have you heard of the S&P 500? This is an index fund. So when the S&P goes up, people say "the market" has gone up. When the S&P goes down, people say "the market" has gone down. That's what I mean by taking the market's "temperature."

If you don't know where to start, an index fund lets you experience exactly the same growth as "the market." You won't be "beating the market" with them, but you won't be losing any extra money either. It's a good place to start so you can learn how well you tolerate risk. When I realized that market drops really don't bother me at all, I moved away from index funds, and I started investing in riskier funds. But I did start with index funds to get my feet wet.

Even though I tend to buy risky funds, I hedge my risk in a bunch of different ways before taking the plunge, as you can see from above. So far, that strategy has worked pretty well for me. I had about 25% growth last year, which was fantastic. The key is really to learn the highest level of risk you can tolerate so that you STAY IN THE MARKET. If you overestimate your tolerance level, you might be tempted to pull out of the market after a really bad day, and then it's very very hard to get back in. There's a whole psychological component to it. When you sell and can't bring yourself to get back in, you have effectively "locked in" your losses. That's the last thing you want to do.

You want to stay fully invested through your lifetime so that money is always growing and then replenishing itself when you start to spend it during retirement. Many people who start investing at a young age die with more money than they had the day they retired. That's because they stay fully invested. What you'll find is that eventually you get a critical mass built up, and you start earning and losing a LOT of money at a time. Any given day I might earn or lose $1,000. My parents are near retirement, and they might earn or lose $25,000 any given day. But the market has always gone up over the long term. So if you can get that critical mass built up before retirement, you will actually earn more in retirement than you are likely to spend... and that means you are never going to run out. But you MUST stay invested, and you MUST start young. Your time is the single biggest asset you have when you are young - not your money. It takes MUCH longer to earn your first million than your second million. This is why I'm a crusader for all things retirement.

Finally, I don't know about the banker steering you in a bad direction. I've actually never talked to a banker directly. I just signed up for a Roth IRA at Fidelity and did the research myself. If you want to use a banker, do look up the funds they suggest on Morningstar before you take the plunge.

Sorry this was so long. I know it seems like a lot to learn, but it's really not so bad once you start! The morningstar reports lay it all out on a chart for you. Just play around with that website, and you'll find them

They really are the industry standard.

Finally, if it makes you feel any better, I just started doing this on my own one day, with relatively little guidance. My dad did talk me through my first morningstar report, but for the most part he's just let me have it and test the waters myself. It's easier to understand once you're doing it. Pick one investment, put some money in, and then spend a few months watching it closely. Check it every day and evaluate how you feel when the market goes up and down. Read some money blogs. Save some more cash for additional investments. And then watch the money start to grow.

hoffse · April 2014

Last thing I forgot to mention: I suggest opening a Roth IRA at whichever bank you choose. That is your "Individual Retirement Account (IRA)" Right now you and your husband can each contribute $5,500/year to your Roth IRAs. The nice thing about Roths is you pay the taxes on the front end. So basically you earn money, pay income tax, and then use after-tax money to fund the Roth.

What happens is the Roth grows tax-free, and when you retire you can withdraw your original contributions AND YOUR EARNINGS tax-free. Money doubles, on average, every 7 years. So being able to withdraw your earnings without paying tax is HUGE.

Compared to a traditional 401(k): traditional 401(k)s have you contribute pre-tax money to the account. That means you get to take a tax deduction the year you make the contribution. But when you pull it out 40 years later, you pay taxes on BOTH the earnings and YOUR ORIGINAL CONTRIBUTIONS. You are also required, by law, to make minimum withdrawals once you are in your 70's. So if you live long enough, you can't avoid paying those taxes. I would rather pay taxes on the contributions ONLY.

There is something called a Roth 401(k). This follows the Roth tax rules, but has 401(k) contribution limits ($17,500/year per person) and is offered through an employer.

Obviously if you have an employer who matches 401(k) contributions, then you should contribute to the 401(k) at least as much as the match to get the "free money." But Roth 401(k)s are also eligible for a match, and I think they are a better tax option than the traditional 401(k)s. Some may disagree, but it's just my opinion.

As free-lancers you probably don't have the option for a 401(k). But in case you ever do, this is something to keep in mind. For now, start with the Roth IRA accounts and see where that takes you.

Xstatic3333 · April 2014

Wow, not much more to add to @hoffse! We should sticky that!

I will say two more things. I also use Fidelity and have met with someone there in person. It was free, they explained a lot, and I never felt pressured. They DID recommend a Fidelity fund, but I didn't feel like it was for the wrong reasons.

One other option I'll mention is target date funds. These funds are based on the date you'll retire, and would be the only fund in your account. They naturally adjust your risk based on how far away from retirement you are. I don't use them because I find picking on my own interesting, and they tend to have higher expenses, but many others like them because they're simple.

emily1004 · April 2014

If you go the financial advisor route, you can research them on the Barrons.com website under New York financial advisors. Ask someone you trust for referrals. Interview a few of them. Since you live in NYC you might make too much for a ROTH, an FA can offer you other options. With different brokerage firms they will offer different funds. We use a Merrill Lynch FA. (Sidebar: He is a family member, and he owns the brokerage firm.)

Yes, there are some unscrupulous FA's out there. Beware of the FA that pitches offers that sound too good to be true, because it probably is. Don't let them pressure you, let them educate you.

KatieCutie05 · April 2014

Don't go through a bank- they are there to make money- not help you. They will likely push you into something thats good for them and not so good for you. Go through a solid investor that will guide you into making the right investments based on your individual situation.

And open a Roth IRA- you put money in after taxes instead of before taxes - so in 30 years when you go to pull it out you aren't taxed on it. Its better to be taxed on 5,000 then it is to be taxed on 5 million.

hoffse · April 2014

emily1004 said:

If you go the financial advisor route, you can research them on the Barrons.com website under New York financial advisors. Ask someone you trust for referrals. Interview a few of them. Since you live in NYC you might make too much for a ROTH, an FA can offer you other options. With different brokerage firms they will offer different funds. We use a Merrill Lynch FA. (Sidebar: He is a family member, and he owns the brokerage firm.)
Yes, there are some unscrupulous FA's out there. Beware of the FA that pitches offers that sound too good to be true, because it probably is. Don't let them pressure you, let them educate you.

This is a good point about your income. If you make too much to contribute to a Roth outright, then you really need to go to an investment bank. There's a "back door" method for you to rollover contributions into a Roth IRA so that you still get the tax perks of a Roth, even if your income exceeds the Roth limits. The investment folks found this loophole about 30 second after Congress passed the law, and Congress has not closed that loophole yet. It's an extra step, though, so I would go with somebody who knows how to do it. An investment banker should be very familiar with how to do this for high net-worth individuals - a guy at your local bank might not be.

For 2014, if you will file your taxes as married filing jointly, then your modified adjusted gross income (MAGI) has to be under $181,000. Calculating MAGI can get sort of tricky, so if you are close to that income level, just go to an investment banker and let them help you figure out which method is best.

vlagrl29 · April 2014

We are both self employed and each have our own IRAs. I have mine with Fidelity and have been very happy with them. They have a local office I can go into any time and meet with one of the financial guys free of charge and he has helped me learn about investing. I manage half of my retirement myself and I have the other half with their management team for now. I get overwhelmed easily so this is a good option for me for now. They charge 1%.

I go with mutual stock funds, a handful of individual stocks, and some bonds. Mine is pretty aggressive as well. I think I'm up 24% since the date of purchase.

If you have a fidelity office nearby I would suggest going with them. You can go in and learn about this stuff and they are a great help.

We are getting ready to switch our bank accounts to Community America and they told me they have a financial guy that you can talk to about investing your retirement with this credit union. I'm just not currently interested in this at this time.

dancinxqueen324 · April 2014

WOW!! Thank you all so much for the info!! @hoffse, I really appreciate you taking the time to write that all out! :-) Sounds like Fidelity might be the way to go for us. It all seems so daunting right now, but this helps tremendously!

dancinxqueen324 · January 2015

UPDATE

I opened a 403b with my job this year and my husband opened an SEP-IRA with his job! We are planning a big move later this year, and then will look to Roth IRA's. Thanks again for your help, ladies! The tiny retirement funds have begun!

Very new to this, need help!

Re: Very new to this, need help!

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