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Retirement investing

Dear Dr. Don,
I'm 46, and my wife is 43. We are self-employed and would like to know where and what to start to save for the future. We have nothing and were thinking of a mutual fund? Any ideas?
Jim Journey

Dear Jim,
I've got lots of ideas. First, look at contributing to a simplified employee pension (SEP) IRA. IRS Publication 590, Individual Retirement Arrangements, explains the contribution limits for these plans. Self-employed taxpayers have a different standard for contribution limits (page 60) than employees of a firm that offers a SEP IRA plan.

Alternately, you may be able to set up a SIMPLE Plan for retirement assets. A Simple Plan is a salary reduction agreement where the money funds a SIMPLE IRA account. IRS Publication 560, Retirement Plans for Small Businesses, provides the requirements for SEP, SIMPLE and other qualified retirement plans.

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Opening one of these accounts with a no-load mutual fund family is a good place to start investing for your retirement goals. I like hybrid funds (funds that invest in both stocks and bonds) for people that are just starting out because it gives them exposure to both types of investments without owning multiple mutual funds.

It's a question of scale. Once you have $5,000 to $10,000 in retirement accounts you don't really need to use hybrid funds to diversify in stocks and bonds. You can buy individual funds that meet your needs.

Hybrid funds usually hold a higher percentage of their investments in stocks than they do in bonds. That's OK because as long-term investors you're willing to accept that weighting.

Two good core holdings would include a stock mutual fund indexed to the Standard & Poor's 500 and a bond mutual fund indexed to the Lehman Intermediate Bond Index. With these investments you're not trying to beat the market, you're accepting investment returns that will approximate the market -- as measured by these broad market indexes. does a great job both explaining the indexes and how you can invest in them.

-- Updated: March 20, 2003

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Types of retirement accounts
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