Risky Business

When you’re in college, perhaps the last thing on your mind is your retirement.

Yet the best time to start planning for it is now, especially with this investment gem: The Roth Independent Retirement Account.

Once you put your money into a Roth IRA, you will never have to pay a penny in taxes on the money, if you follow the rules. That means it can grow much more effectively than it would in any other account and especially better than in a bank savings account. And as long as you don’t remove your earnings until you’re 59 and a half, you won’t have to share a cent with Uncle Sam.

Why is it better to start early?

Say you started late and invested $3,000 in a Roth IRA at age 35 and continued putting in $3,000 per year until you were 60. You’d have $220,000. But if you contributed $3,000 a year to your Roth IRA for 10 years starting at age 18, you’d have about $414,000 at age 60.

So if you start investing money at age 18 and contribute about $2,000 a year, you can become a millionaire if the stock market acts as it has historically.

But to get there, you will need to invest in the stock market. The easiest way is to invest the Roth IRA money in what’s called a total stock market index fund.

If do you that, you will own a tiny piece of about 5,000 different stocks that will be in your mutual fund.

Don’t pay attention to your fund if the market goes down for a while. There have been years when the market has gone down 50 percent. But over time it recovers because the U.S. economy keeps growing. If a person had put $1 into the stock market in 1925, it would have grown to $2,533 at the end of 2004.

The key is to find an index fund that will accept you as a client. If you can invest $1,000, you can open a Roth IRA at one of the lowest-cost mutual fund companies, Vanguard, and invest in the Vanguard Total Stock Market Index Fund.

Keeping costs down is a tremendous plus in the long run. It can leave you with almost twice the nest egg after a lifetime of investing as you would have with a high-cost fund.

If you don’t have $1,000 or the ability to invest $50 monthly, there are hundreds of other choices. You can open a Roth IRA at a bank, for example, and deposit small amounts of money. But beware of mutual funds at banks. Many charge you loads of fees or large sales charges. And the bank mutual funds are often expensive day in and day out, too.

If you put money in an index fund, the broker at the bank should not charge a lot of money either up front or years later. And the “expense ratio,” or what you will pay for the privilege of using the fund, should be no more than 0.5 percent of the assets you will have in the fund.

Vanguard, for example, charges only 0.18 percent for its total stock market fund-an excellent price.

Now that I’ve given you the warning on fees, however, let me backtrack just a little. If you can’t get into a low-cost fund at a place like Vanguard and think you should give up, don’t. A fund that charges 1.5 percent in fees is better than not investing at all.

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