||Ask Dr. Don
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?
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
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
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
-- Updated: March 20, 2003