[In response to a question about Roth IRAs and Vanguard dividend funds.]
Yes, the individual max for a single year is $5,000. However, you can actually make your 2011 Roth IRA contribution until Tax Day (usually April 15th, but this year it's Tuesday, April 17th for some reason). So, you could actually contribute $5,000 for 2011 and have until next April to contribute your $5,000 for 2012 (but could have done it as early as January 1st, 2012, so you could contribute $10,000 for yourself right now).
Additionally, you could contribute that same $10,000 for your spouse ($5,000 for 2011, and $5,000 for 2012) as long as her retirement plan at work is not an IRA (contributions to a traditional IRA reduce dollar-for-dollar the amount that you can contribute to a Roth IRA, but 401k contributions don't count against IRA contributions). So, you could actually potentially contribute $20,000 total right now if you wanted to!
Each of those years you would have to have a combined income of at least the $10,000 that you're contributing for that year. As far as income limits, I think that they're $105K for individual filers ($120k for partial contribution), and $169k for joint filers ($179k for partial contribution). For Vanguard, the minimum to open a Roth IRA account is $3,000. I agree that Vanguard is still the best place to open a Roth IRA account : ).
You can be a little more aggressive with contributing to Roth IRAs because you can withdraw what you contributed (the principal) at any time WITHOUT taxes or penalties (which can be handy in the cases of financial hardship or large one-time needs like a downpayment on a home). Earnings on your contributions CANNOT be distributed until retirement — without incurring a 10% penalty. So, you could consider moving some of your emergency savings into your Roth IRA, since you can pull them out without penalty if you really had to. That way you can take advantage of more of the maximums that you're allowed to contribute. So, for example, if you've contributed $20K over 4 years, but your Roth IRA is now worth $23K, then you could take out the $20K with no penalties, but would be penalized if withdrew any part of the $3K earnings.
I am still a huge fan of focusing on dividend / income producing stocks. Smart Money's Jack Hough (yes, that's really his name), a dividend advocate, notes that "Over the eight decades ended September 2010, dividends contributed 44% of S&P 500 total returns, according to research by Fidelity Investments." A lot more attention is being paid to dividends, so yields are being squeezed, but you can still count on dividends accounting for much of overall growth (especially if you're cherry-picking the best dividends rather than the total market as a whole), and being a safer way to achieve growth as well as sufficient funds in retirement. As with all investing, you should opt to reinvest dividends.
However, it's really risky to not have a balanced portfolio. You need a mix of large cap, mid-cap, and small cap, domestic, foreign, emerging markets, bonds, treasuries, and even total market. The promise of target date retirement funds is to cover all of that for you, with a risk allocation appropriate for your age (getting gradually more conservative as you near retirement). In general, target date retirement funds haven't had the best track record, but they've gotten a lot better; and Vanguard's have always been pretty good. Clark Howard (my favorite radio show / podcast ever... seriously, if you want common sense financial advice, as well as great tips on how to save — especially on travel, and how to avoid getting ripped off, then Clark Howard ought to be a centerpiece in your financial diet) has brought me around to the virtues of target date retirement funds. If you want your retirement investing to be as easy as possible, then target date retirement funds are the way to go. If you want to be more aggressive, then choose a fund that would have you retiring at age 70 or later (to give you a larger allocation of, and keep you weighted towards stocks for longer). If you want to be more conservative, then choose a fund that would have you retiring at age 60 or earlier (to give you a larger and earlier allocation of bonds). This won't change when the funds are available to you — just what your allocation and risk profile is.
If you want to be a little more hands on, then I would recommend going the Lazy Portfolio route. That lets you give more weight to asset classes that you're more comfortable with. Just remember to rebalance annually (or as you make contributions).
If you want to invest in individual stocks (as opposed to funds), then I recommend to people that they direct no more than 10% of their contributions towards individual stocks, and that 90% of it go to broad-ranging funds. So, for example a maximum of 10% saved goes towards individual stocks, and at least 90% saved goes towards a target date retirement fund. Or, 10% towards individual stocks, and 90% towards a lazy portfolio. Or no more than 10% towards individual stocks, at least 45% towards a target date retirement funds, and no more than 45% towards dividend focused funds. If you're actually a really good investor, even though you only direct 10% of your retirement savings towards individual stocks then that portion may grow substantially and be more than 10% of the actual value of your portfolio. However, you should continue to direct no more than 10% of your contributions towards individual stocks. Conversely, if you're really bad at picking stocks, then only 10% of your portfolio is shrinking. You can continue to direct 10% of your contributions towards individual stocks, but should NOT increase your allocation to compensate and bring the total value up to 10%.
And, it's always a good idea to practice dollar cost averaging. So, stick in the whole amount into the Roth IRA right now in a money market fund (whether it's $4K, $5K, or $20K), but purchase the stocks over time (a little each month). At Vanguard, this would be "Automatic exchange". In the future, you could also automate monthly contributions as well. Again, you'll have to start your purchase of any given fund with $3,000, but you can trickle in the remainder over the subsequent eleven months, or whatever, as long as it's at least $100 each month.
Vanguard has a number of GREAT dividend focused funds. I like them all for different reasons, so you should pick one that matches your investment philosophy and risk appetite. Here's the list of Vanguard funds. If it isn't already, then sort it by "SEC Yield". Read the "Product summary" and check the "Risk potential" for any that are of the Asset Classes "Stock - ..." or "Balanced" (or, check "Balanced" and "Stocks" in the "Asset class" filters to the left, but I kind of like seeing them in relation to the other funds). "Balanced" includes bonds and treasuries, as opposed to focusing just on stock dividends. Ignore any that are "Bond" as those will be covered in your target date retirement fund, as well as any that include the word "Admiral" in the title (unless you're willing to meet the $10K minimum). Focus on those that include either "Dividend" or "Income" in the title, as dividends and income are ancillary for any other funds and therefore more likely to fluctuate if their actual strategy results in lower dividends or income. And, you may want to focus on just those that hold primarily stocks (equities, see "Portfolio and Management" tab on each stock page to see holdings) as those with substantial bond holdings are likely to see a share price drop as bond prices return to historical norms (which means that yield will rise, but that means that you're better off waiting until then to purchase those funds as they'll be cheaper then). Of those that interest you, you can delve a little more into them (performance, portfolio, prospectus, reports, etc.).
I would start by allocating at least half into a Target Date Retirement fund. I'm pretty sure that you have to start with $3,000 in each fund even in Roth IRAs. So, to purchase two funds right now (target date retirement and dividend focused), you'd need to contribute at least $6,000. If that's true and you're contributing less than $6,000, then I would either start with the target date retirement fund, and then use next year's contribution to purchase the dividend fund, or vice versa (a year shouldn't really matter all that much, so you should be okay just getting the dividend fund). You can add to a fund that you already own in $100 increments.
No comments:
Post a Comment