 Investing
for retirement when you're young
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 Dear
Dr. Don,
I'm a 26-year-old college graduate with student loans and the uncertainty
of how to prepare for retirement. At my current job and potential
career, I will never be able to have the opportunity for a 401(k),
so my question is how I go about saving for retirement as well the
immediate future i.e. house, car etc.
Currently, I have a savings account as well as a Roth IRA, but
I know that is only the beginning. I'm two years out of college.
In the first year I focused on paying off my debt, which I have
to some extent, and now I'm focusing on long-term financial goals.
How do I survive without a 401(k)? Also, should I buy a mutual fund?
I can only contribute $4,000 to my IRA, so that isn't my answer
either. I'm confused and worried about my future. What to buy, from
whom and how to do it? Help!
-- Nick Knowledge
 Dear
Nick,
As I told Joseph in yesterday's column, "Saving
when you expect to be rich," don't pass on the opportunity
to contribute to Roth IRA or traditional IRA accounts in your 20s.
Thirty-forty years of investment earnings can make these acorns
into mighty oaks.
There's a lot you can do with taxable accounts and
tax-efficient investing. Long-term capital gains and qualified dividend
income are taxed at lower rates. You can also invest in a personal
residence and the first $250,000 in long-term gains from that investment,
$500,000 for married couples, is tax-free. A Bankrate feature, "Capital
gains home-sale tax break a boon for owners," explains
the real estate tax break in greater depth.
With mutual funds, investment earnings are passed
through to fund investors as they are realized. That makes it harder
to manage the tax impact of investing in mutual funds, although
mutual funds are rated for tax efficiency. An exchange-traded fund,
or ETF, is one approach to managing tax efficiency, but ETFs aren't
always the right choice. The Nasdaq guide,"ETFs
From Soup to Nuts," explains this investment vehicle in
greater depth, while a recent Morningstar article
discusses their tax efficiency.
The point is that you don't have to qualify for tax-advantaged
retirement accounts to have investing for your future make sense.
Make your taxable accounts work for you, too!
I like using online discount brokerage firms and/or
dealing directly with mutual fund families, but I'm not a lay person
when it comes to investing. Get comfortable with how you want to
invest and where you want your investment accounts before committing
the funds. Work with a financial planning professional if you need
help getting to that point. An earlier Dr. Don column, "Picking
a financial adviser," talks about finding that professional.
To ask a question of Dr. Don, go
to the "Ask the Experts"
page, and select one of these topics: "financing a home,"
"saving & investing" or "money."
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