Better keeps getting better! Vanguard, the company I use for my Roth IRA, recently did away with their $3,000 minimum deposit requirement for Target Date Retirement funds. That’s more like it! Before the change, the only fund with a lower minimum was the STAR fund at $1,000. The STAR fund is alright, but I like me some options.

I started my IRA with $1,000 in the STAR fund and figured I’d reach the magical 3 grand mark someday down the line. Now my timetable is moving on up. I’ll be moving over to a target date fund shortly. The main reason is risk. I’m young and not concerned with day to day ups and downs, so I’m cool with having most of my money in stocks. By making the switch I’ll be invested in stocks 26% more than I am now. More risk = more return.

If you’re in my age bracket (18-23) the fund you want is called the “Vanguard Target Requirement 2055 Fund“. No, the name’s not exciting but it is descriptive. 2055 is a long way off, but money invested now is gonna be worth a whole lot more when withdrawal time comes.

Target date funds are amazing cuz you don’t have to do any work!* As time passes, the mixture of stocks, bonds, and other investments gets more conservative. When we’re young, having 90% of our money invested in the stock market is fine, but that’s not such a hot idea when you’re 60 and don’t wanna work anymore. When you’re older, you want less stocks and more bonds. Target date funds make that happen automagically.

*While you don’t have to do any work, you should. Checking up on your investments is just smart – you may want to make some adjustments every now and again.

Thanks to today’s paycheck, I’m only $200 away from being able to open a Roth IRA at Vanguard. I’ve been putting $50 per paycheck towards this goal, so I’m now only 8 weeks away from having the full $1,000 I need. But I’m starting to think I could get this Roth IRA party started a lot sooner.

I’ve got $1,000 in my emergency fund. I could take/borrow/raid $200 and open up my IRA ASAP. Then I can start adding $50 per paycheck directly to my IRA 2 full months sooner. Or pay back my e-fund. A Roth IRA isn’t really meant for retirement, but it does have one cool feature: You can take back any money you put into it at any time for any reason without paying tax or a penalty. That’s the only reason I’ve even considering this. If something cuh-razy happens and I need a random $200, I can get it no prob.

I’ve usually been against people using Roth IRAs as emergency funds or putting IRAs ahead of savings – it just didn’t feel right. Whatever that means. After thinking it through though, I’ve changed my mind. I’d still have $800 to use if necessary. My paychecks are also steady and I can safely assume I’ll be bringing in at least $400 a month. Honestly, my e-fund was more of an experiment to see if I could actually save up a significant amount of money. I accomplished that goal and my e-fund has barely been touched since. Living at home, I rarely have true emergencies that require lots of cash.

Emergency fund to Roth IRA is go!

Do you use a Roth IRA as an e-fund? Maybe just a little bit? Don’t worry, we’re all friends here, you can admit it.

The company I work for offers a 401K plan to all employees, even part-timers like myself. The only requirements are that you must have accumulated 1,000 hours and be 21 years old.

The problem is that I can’t participate even though I should be close to the 1,000 hour requirement because I’m only 18. Dumb, isn’t it? I’m technically an  adult, so there’s no legal reason why I can’t contribute and get that sweet employer match.  I was disappointed a few months ago when I found out I can’t contribute to my company’s 401K plan, but now I’ve got more information to understand what’s going on.

I called T. Rowe Price, the firm who handles the plan, and asked to find out if I was eligible. The first representative I speak to gives me great news. She tells me that while I have to be 21 to receive the match, I’m able to contribute to the plan at 18. I’m stoked, no doubt, because 401K contributions would be taken out of my paycheck before taxes. That means I’d pay less in taxes. Sure, losing the match isn’t the best scenario, but I’m all about reducing my tax liability.

The woman transfer me to an “account specialist” so we can setup my account figure out how much I want to invest. Right off the bat, I find out that it’s a no-go. The guy tells me that the plan simply won’t let anyone who isn’t 21 years old contribute to the plan, regardless of matching. FML.

I decide to ask him if the age requirement is a legal issue or simply a company policy. What he tells me is interesting. According to the IRS, a company has to let an employee contribute to a 401K plan once they are 21 and have been employed for 1 year. Before that, the company can make up its own policies.

Now the only question I’m left wondering is whether this was intentional or not. This obviously saves the company money since there’s no match to be paid.  My company also employs a lot of high school and college age kids who could contribute.  On the other hand,  I doubt many would participate. I’m the 18 year old weirdo who wants to pad that 401K!

I think it’s more realistic to assume that when 401K plans are set up, companies simply using the default IRS guidelines to remain on the right side of the law. 401Ks are usually viewed as a benefit of working for an organization, one that will hopefully keep you productive and from jumping ship. Few 18, 19, and 20 year old part-timer workers are going to stay with the same company after graduation, even if they could utilize the 401K.

Right? Cause I basically did just that. I opened an account at E*TRADE last year for my Roth IRA, but I only made one deposit – the initial one. After that, I let it fall by the wayside. I tried to login to my account a few months ago, but I couldn’t remember my password and was too busy lazy to request a new one.

A few days ago, I received a letter from E*TRADE showing my year end balance and investment return. My total account assets amount to – drumroll please – $57.58. I dropped the ball big time on this one. The problem was I honestly didn’t know what the hell I was doing. I knew I should set up an IRA, but I didn’t know what to do once it was set up. I had read about Target Date Funds; you simply tell whoever holds your investments (E*TRADE in my case) when you want to retire – around 2050 for me – and they pick the right investments so you hopefully retire at the time you want to. Basically, it’s investing for retirement on autopilot.

Yet, E*TRADE doesn’t seem to do this. I looked all over their website and I couldn’t find any way to start investing in a target date fund. So I purchased one share of some index fund that I thought looked good. I told myself I’d come back later and do more research. Guess what didn’t happen?

I don’t want to spend hours analyzing investments. ZZZZZ. I’m not an expert and even the experts aren’t really that good. I want to tell my investment company: “Every month, take this $50 and put it in a fund that will automatically adjust as I get closer to retirement.” Done. Simple. Easy. That’s what I want.

Since E*TRADE apparently doesn’t offer this service (if they do and I’m missing something, let me know), I’m taking my Roth IRA somewhere else. I’ve settled on a place called Vanguard. Their fees are ridiculously low and their investment philosophy has little in common with the “yeah, let’s pick some hot stocks today” you hear on TV. Bottom line: No bullsh*t.

The only catch: I need a minimum of $1,000 to invest with Vanguard. This isn’t unreasonable, but it’s far from the $50 minimum E*TRADE asked for. Once I get that saved up, I’ll be transferring my account.

Opening retirement or savings accounts is great, but make transfers automatic. You can lie to yourself and promise that you’ll send $50 or $100 each month to those accounts, but you won’t. Make it happen without you having to lift a finger.

I mentioned in my Financial Mad Lib post that I want to have a cool 5 million dollars saved up at retirement. I thought I’d explain how I decided on this number.

1 million seems to be a popular amount, but I don’t think it’s enough. At least, I think it’s risky to assume it’ll be enough. According to the CDC, I (and any other white males born close to 1990) can expect to live for another 15 years once we hit 65 and turn ancient. 1 million would give me $66,666 to play around with every year before I die. That number might be enough, but here’s 2 things to keep in mind

1. $66,666 won’t be $66,666 in 2057. Try something closer to $16,617.
2. I have hexakosioihexekontahexaphobia

We did this exercise in my finance class last quarter where we figured out what amount of money we would need in 40 years to equal the value of 1 million today. A crazy 3,262,000! Inflation is lame, but it’s real important to consider. This means that while I may have an account balance of 5,000,000, it’s actually only worth $1,246,293 in today’s dollars. (In a weird way, I am only saving about 1 million!)

So I could aim for $3,262,000. Or I could try to kick retirement saving ass and go big. That’s what I’ve decided to do. I figure even if I don’t make my goal, I’ll still be OK and won’t have to be the guy eating Meow Mix (meow meow meow meowwwwww!). Let’s say I screw up or the markets are bad or something else prevents me from saving enough and I only end up with HALF of what I wanted. I’ll still have $2.5 MILLION FREAKIN’ DOLLARS. Even in 2057, I don’t think that I’ll equal me starving.

That’s my goal, but I’d love to hear about yours. How much do you want to have? How did you decide on that #? What type of cat food would you want to eat, if it comes to that?!?

Besides buying alcohol, it turns out that I also can’t contribute to the 401K plan offered by my company. I thought 18 was old enough to legally enter into financial agreements, but I guess the government or my company had other ideas.

Talk about a bummer. My company actually allows part-time employees to participate, but not me. They provide a dollar for dollar match. If I contribute $100, they put in an additional $100. This is about as close to free money as you can get. But I can’t participate. Because I’m not 21.

I need to do some more research to see whether this age requirement is a company policy or some odd law. I’m leaning towards company policy. The plan is handled by T. Rowe Price and I’m positive they would let me open up a brokerage account with no problem. E*Trade did and the only requirements were to be 18, and you know, have money to invest.

Frustrating is about the only way to describe the situation. Everyone always says that a 401K plan with a match is a no brainer – set aside as least some money to contribute. I actually want to as a freshman in college and I’m told I can’t!

Today’s post is a continuation of this week’s series: “I’m 18! What Should I Be Doing With My Money?“

Next up in this series, we’ll tackle what’s probably the last financial issue on your mind. Nonetheless, it’s extremely important:

Retirement!

Yes, I know none of us will be retiring anytime soon. But interestingly, we are the ones who benefit the most by saving. Those who wait to start saving will lose out on THOUSANDS, if not hundreds of thousands, of dollars by not starting as soon as possible.

Just one $2,000 dollar deposit in a Roth IRA (Individual Retirement Account) when you are 18 can grow to over $74,000 dollars by the time you are 65 (assuming an 8% return).

Invest the same amount when you graduate college at 21 and you’ll only have $59,000. Three years of waiting just cost you fourteen-thousand dollars!

Note: You don’t have to deposit $2,000 dollars if you don’t have that much. This is just to illustrate the benefit of starting as soon as possible.

Saving for retirement is easy. You just need to open a Roth IRA (Roth IRAs have numerous tax benefits that make them perfect long-term investing) and contribute money to it. Once it’s there, you can purchase investments like stocks, mutual funds, and index funds. To open the account you just need:

• Your social security number
• Your home address
• Your phone number
• And some money

If it helps, don’t consider this a retirement account. Consider it a freedom or opportunity fund. It’s purpose is to provide you with financial security when you are older and may no longer want to work. It simply gives you options later in life.

If for some reason you desperately need the money in a Roth IRA, you are free to take out whatever you have deposited. You cannot, however, take out your earnings until you are 59 1/2 unless you want to pay a penalty.

You can open a Roth IRA through many different companies and brokerage firms. I chose to open mine at E*TRADE. They don’t have any minimum account balance requirements, which is great for those of us who don’t have a huge cash reserve built up.

Saving for retirement is not something you want to wait around to do. There’s honestly no reason why you can’t open one the day you turn 18. I’m “only” funding my Roth with about $50 bucks, but it’s a start.

If you’d like, you can jump back to the previous post in this series: Learning the Basics of Money Management.

If you’re reading this, you’re most likely a high school or college student. The thought of saving money doesn’t exactly excite you. But it’s important that you do. Your goals probably include getting a job, not retiring. But retirement will happen much faster than you think. Saving now will make the future a much better place.

You might be thinking “This is stupid, I could be using my money now to buy a new video game every week or I could have the newest iPhone.” Truth be told,  you could do those things or maybe you already have. But now is still a great time, if not the best time, to start saving.

Still not sure if you believe me? What if I told you that you could save a little bit of money now and have a ton of money later?

Interested?

Follow along.

To illustrate my point, let’s take a look at Mike. Mike opens a Roth IRA on his 18th birthday. He puts 2000 dollars into the account that averages a return rate of 8%. He retires at 65. Guess how much money he has.

74 thousand dollars!

I’m not making this up, it’s just the way the math works.

But if Mike waits a few years and doesn’t start his account until he’s 25, he’ll loose 27 thousand dollars. This is why it’s so important to start now. By waiting, you are literally throwing money away.

If you thought that a single deposit of 2000 dollars resulted in a ton of money later, imagine what adding more money every year will do.

Adding 2000 dollars every year will net you over a million dollars.

I think a million dollars is worth spending just 2000 a year.

If you want to make a financially secure future for yourself, the time to start is now.

Now that we’ve talked about what a Roth IRA is, it’s time to set one up. To start an account, you have to first pick a broker (someone who buys and sells investments on your behalf). Luckily, it’s not hard decide if you’re young or broke or both.

Of the following companies that I researched, only one would allow me to open a Roth IRA with no minimum deposit or fees.

• T.Rowe Price
• Fidelity
• Scottrade
• Vanguard
• Zecco
• Charles Schwab
• TD Ameritrade
• E*Trade

The decision was pretty much made for me. While I liked Vanguard’s investment strategy (the company is built on index funds, which have low expenses with good returns), I didn’t want to wait to save up $1000 to go with Vanguard. (Other companies wanted at least $500)

Another plus was E*Trade has cool commercials like this one.

So, to setup the account, all you have to do is download this form. (If you’re over 18, you can open it online here.) It asks for the standard information that you’d give any bank when you open up a new account. Address, Social security number, blah blah blah.

There is one section where it asks what your “investment objective” is. I chose Growth, since I’m willing to take some risks (I have 40-50 years until retirement) but not complete chance like Speculation. For trading, I chose 0-3 per month, although I honestly have no idea how often I’ll trade.

In section 9, “Select Your Account Options”, I chose the E*Trade Financial Extended Insurance Retirement Sweep Deposit Account. This is basically just a saving account where your money hangs out until you invest it. Beside this section, you’ll notice you can choose to receive certain account information through the mail. DO NOT select any of these unless you want to pay a fee to E*Trade. (Hint: You don’t)

Once the form is filled out, put it in an envelope along with a check made out to E*Trade Clearing LLC for any amount. The address is listed on the 1st page, in the upper left hand corner. Mail it.

Seriously, that’s it.

Once E*Trade sets up the account, you’ll be ready to invest.

Have you earned any income in 2009? It could be from the local pizza place, the American Eagle in your mall, or even the cash you received for walking the neighborhood dogs. If you do, there’s a great place to put part of it.

The place is called a Roth IRA. IRA stands for Individual Retirement Account. It’s named after William Roth. What’s so great about it?

What’s awesome is that they allow your money to grow to enormous sums. If you put $2000 a year in a Roth IRA from age 15 until 60 and the market returns 9%, (entirely possible over a period of 45 years by the way) you would have over a million dollars. That’s sick isn’t it? I may be geeky, but that seems really exciting. Even better, you can take this money out when you retire without paying a cent in taxes.

Another bonus for teens: You don’t have to pay income taxes unless you make over $8,950 a year. Since most teens never come close to this, it means that any money you contribute to a Roth IRA will never ever be taxed by the government.

But I don’t have two thousand dollars! What am I going to do?

It doesn’t matter. Open one up anyway. You don’t have to contribute two grand if you can’t or just don’t want to. What’s important is that you open it and put something in. In the future, when you get a “real” job you can start contributing a lot more. But there’s no time like the present and every year you wait, will cost you money. Not just a little money, but a lot of money, as in thousands of dollars.

What’s the Catch?

There aren’t too many disadvantages to a Roth IRA, but keep in mind:

The money you contribute has to be earned. This means you can’t just put in money you got as an allowance. If your parents are really generous though, they can contribute whatever amount you’ve earned and then let you “keep” your money in a savings account or even in cash. You might try to see if they’ll match your contributions. Example: “Mom and Dad, I’ve earned $1000 from mowing lawns this summer. I’d like to keep part of that money to use during the year, but I was wondering if you would contribute $500 if I put in $500.”

Also, you can’t access your earnings until you’re 59-1/2. This shouldn’t be a problem though because the point of this account is to save for retirement. This is not the account you use to save for a car.

You need to have proof you earned your income. This typically means filing a tax return. I know this sounds scary at first, but don’t worry, it’s really easy. I’m planning to write an article on how to file your taxes by the end of February.

If you aren’t 18 yet, you’ll need one of your parents to be the custodian on the account. This is because minors can’t legally enter into financial or contractual agreements by themselves.

Even with these requirements, the Roth IRA is a great way to prepare for your future. You’re young. You have a huge advantage over older people who never opened one. Use it.

Tomorrow, check back for: Where and How Do I Open a Roth IRA?