Dear Dr. Don,
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


Dear Renee,
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 ” Which 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.

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