Reader Q&A Series: How and Where to Invest Retirement Savings and for Kids' College Education

A new reader of my blog recently contacted me on Facebook and asked a series of questions on investing. The reader was/is new to investing. I am paraphrasing these questions and answers and have removed the identity of the reader to protect privacy. I am posting these Q&A in the hope that these will benefit people who are new and want to get started with investing.

Reader:

I have no knowledge on trading or investments. I opened an IRA last year at the Bank of America and later realized I should have opened one in brokerage firm. Can you suggest me what is the procedure, where and how to invest in an IRA? Also, do you know any financial adviser as I am interested in mutual funds and safe stocks?

Buy & Hold Blog:

Thanks for contacting me. The best place to open IRA as well as any taxable investment accounts is Vanguard. I highly recommend this company because of their low costs and a vast array of high-quality index and actively managed mutual funds.

I'd agree with you that you do not need to stay with Bank of America (BOA) for their IRA account. You should first open an account with Vanguard and ask them to rollover your BOA IRA investments at the same time. This will keep your investments in one place and will simplify the investment process. You can open the account online, but you may need to call them to ask about IRA rollover process.

You should also think about whether you would like open Roth IRA or Traditional IRA or Both. I have both accounts between me and my wife. In addition, I have taxable investment account with them. I also have 401(K) plan through my employer with Vanguard as well.

I have written several articles on investments on my blog. Just read a few of them and you would get an idea of how mutual fund investment works. 

Regarding your second question about hiring a financial adviser, I'd NOT recommend you to get one. Generally speaking, financial advisers charge a bunch of money and there is a lot of conflict of interest in the products they tend to push to newbie investors. Buy and Hold investing is a do-it-yourself approach that I talk about on my blog. 

Thanks for contacting me.

Reader:

For IRA account, do you want me to choose Target Retirement Date Fund or other mutual funds? If it is a Target Retirement Fund, which target retirement fund you would recommend. I'm 35 years old and my spouse is 45. What I'm thinking is that I will invest in a Target Retirement Fund for my IRA account and I will go with index funds from your sample portfolio for my taxable investment account. For my taxable taxable investment account, I can sell my funds any time right in an emergency ..... no penalties right?

Also, I read on your blog that Target Retirement 2060 fund is aggressive , so Can I invest my IRA amount in that fund for 3 to 4 yrs now and later change to another Target Date fund/other mutual funds? Is it worth the hassle?

Buy & Hold Blog:

Target Retirement Date 2060 Fund may be a little too aggressive given your and your spouse's age. I'd suggest that you should rather go with Target Retirement Date 2050 fund. Also, the difference between 2060 and 2050 fund is rather small in the initial 20 years.

In my own case, I'm 36 years old and my wife is 30. I've a Target Retirement Date 2050 in my 401(K) account as I did not want to mess up my retirement nest egg. In addition, I've Target Retirement Date 2030 fund for our daughter's college education (who is 3 years old now) that I've in my taxable investment account. Several years before she enters the college, this fund will become conservative. And, currently I am holding a Target Retirement Date 2060 Fund in my taxable investment account as a temporary placeholder for the time being to hold our house mortgage payoff money.

To answer your second question, you can always change funds in your IRA account without incurring any penalty.

For your taxable investment account if you choose to open it, I'd suggest Portfolio #3: Simple Four Index Fund Portfolio. It covers the entire gamut of stock, bonds, real estate, international, and domestic markets.


Reader:

Just to be clear, for IRA, you suggest to go with Target Retirement Date fund and for taxable account, go with one of the portfolios, correct? Also, You mentioned to avoid some fees in Vanguard, invest more than $10,000. Can I just invest $10,000 at a up-front and avoid fees?

Buy & Hold Blog:

Yes. This is because you don't have to worry about re-balancing your portfolio. Also, yearly limits on IRA accounts limits the # of funds you can buy in an IRA account. So, it is generally not worth it to buy multiple funds in this account. Since you are new, Target Retirement Date Fund would be a good choice for you and it will provide diversification without breaking your bank.

In your taxable investment account, you can go for multiple funds because you can control buying and selling without any restrictions.

To answer your second question, NO, you don't need to invest $10K up-front to avoid paying extra expense ratio cost. I'd recommend against it. I'd recommend that you start with the fund minimum of $3000. And, add your incremental investments weekly, bi-weekly, or monthly. I do weekly. You can choose how much you want to add incremental investment. You can go faster or slower depending on your appetite. Once your fund value reaches $10K, Vanguard automatically converts it to a Admiral version of the fund (the one with lower expense ratio).

Long story short, just start with minimum and slowly build it up to $10K. In this process, you will also benefit from dollar cost averaging.

Reader:

Got it, thanks. One more question. Can you clarify about weekly incremental investment? $3000 per week sounds very steep.

Buy & Hold Blog:

Perhaps you misunderstood me. $3000 is the initial purchase minimum. Once you buy the fund, then there will incremental minimum which is typical around $100-125. Once you purchase the fund in your account, you can add weekly, bi-weekly, or monthly automatic investing. This will come after you open the account and purchase the fund.

Reader:

Thank you. First month I will buy VTSMX, next month VGTZX like that. I will try to add small increments every 2 weeks.

Buy & Hold Blog:

Sounds like a good plan.

Reader:

I have one more question for kids' studies. Which one u prefer Georgia 529 plan or invest in mutual fund?

Buy & Hold Blog:

I don't like Georgia 529 plan as the tax deduction savings are not worth the expense ratio costs and the quality of available funds. Invest in a taxable account.

Reader:

You mentioned that, you can contribute only a maximum of $2000 in a year. But, I was told by my friend that you can invest up to $13,000 per kid per year. Can you clarify?

Buy & Hold Blog:

Per this link, "All Georgia taxpayers may now contribute and deduct up to $2,000 each year on behalf of any beneficiary regardless of their annual income."

Even if $13K per kid per year maximum contribution is allowed, it is pointless to put that much money in a College 529 plan when you cannot claim tax deductions on it. This is why I suggest going with a taxable investment account route because you have better and more fund choices and have greater control to withdraw those funds. Remember that, College 529 funds cannot be withdrawn for things other than qualified educational expenses. If an emergency arises and you need money, you won't be able to withdraw that money.

Reader:

OK. thanks for your help.

Buy & Hold Blog:

You are welcome. Glad to be of help.