We are in our early 30s and would like to start saving and investing for retirement. Our problem is we do not have a lot of money to work with. We're not sure how to get started, as we only have about $50 a month to contribute toward savings. Are there any plans that will work for us?
-- Renee Retirement
Your first decision is between the types of available tax-advantaged retirement accounts. If either of your employers has a 401(k) plan where the firm matches all or part of your contribution, that's the place to start. Minimum contributions to a 401(k) plan are typically quite low. Other choices include a Roth IRA or traditional IRA.
If your employers offer 401(k)
plans, your ability to contribute to a traditional
IRA account may be limited. Roth IRA contributions
are currently limited based on your income level.
Bankrate's feature "Retirement
Plans 101" provides a nice overview on your
eligibility. The Vanguard interactive work sheet
IRA is best for me?" can help you decide between
the two accounts if you are eligible to contribute
to either type of IRA.
If a 401(k) plan isn't in the cards, decide where you will hold your Roth or traditional IRA account. You can choose between a bank account, a brokerage account or investing directly with a mutual fund. The key to your decision will be the annual fees assessed on the account and minimum account sizes or contributions.
If you're saving $50 a month, you can make a total investment of $600 in the first year. Paying a $50 account fee means you're losing 8.33 percent on your money before considering any investment returns. Fidelity has a no-fee IRA but requires a minimum $200-per-month contribution.
It's likely that a bank IRA is your lowest-cost option to get started. By that, I mean a bank account, not a brokerage account at a bank. There may still be a custodial fee but it should be less than a brokerage or mutual fund account. Build up your balances over the next few years. Once you meet a mutual fund company's account minimums, transfer the money to an IRA account with the company.
If you can afford $50 out of your monthly spending to save for retirement, you may be able to ramp up your contribution a little bit more by considering the tax advantages of a 401(k) or traditional IRA contribution. When contributions reduce your income taxes, a $64 contribution only costs you about $50 in take-home pay, assuming a marginal federal income tax rate of 22 percent.