Originally posted by: Zakath15
I'm looking at three long term goals... saving enough to eventually earn a small amount each month off interest ($500 or so), looking about 10 years down the horizon; saving for my kids' college fund ($500,000 or so), looking 30 years or so; and saving for retirement ($2,000,000 or so), looking about 40, 45 years out.
I'm trying to figure out the best way to organize each type of account - this is what I'm thinking -
retirement - Roth IRA Mutual Fund Account, focusing on income funds, more volatile funds (for now).
college fund - Non-IRA Mutual Fund Account, focusing on growth funds, less risk, but enough growth prospects to make it worthwhile over the next 30 years.
income - intermediate term - regular brokerage account, focusing on stability - bond funds, etc.
My main question is focusing on the Roth IRA mutual fund account... since it is so long term, I know I can play around more with regards to risk, etc. But I also want to make sure that I'm maximizing my capabilities. Mutual funds tend to lower risk a bit - if I really wanted to take charge of it, I'm thinking an IRA brokerage account might be a smarter idea, since I can customize it, and I have the potential for much greater returns, or I can just leave it in a money market.
Any ideas, suggestions, etc?
Hey Nate.
Goal 1: $500 interest per month (is that in today's dollars or inflation adjusted? What assumptions do you want for inflation? It's averaged 5% almost over the past 30 years)
Oh a comment: you can't touch annuities before 59.5 just like a qualified plan else you are taxed on the gains.
Solution 1, invest in a 70/30 bond/equity strategy (using large cap companies or indexing the S&P 500. You can take more risk if you want but it's 10 years out so your call. What do you think the market will do?) later switching to a pure bond strategy that has high income. Now the trick here is how will you cover that money. Two possible solutions. An open account where you are taxed on the gains with a dividend/interest reinvestment or a Roth IRA. In a ROTH, you can take out your initial contributions without tax since it's post-tax money. So long as you don't touch the gains, you can have income and still use the ROTH at retirement.
Solution 2, similar to previous and using an IRA. Put money in it but instead of withdrawing money as needed, annuitize the IRA using section 72(t) of the IRA code. What that means is that you start taking regular, equal, periodic withdrawals until the money is depleted. BUT, the account still grows due to interest/capital gains so you receive payments. Note, that payments here can vary
Solution 3, straight open account in a brokerage investing in mutual funds/equities/bonds
Solution 4, one of those crazy MLM schemes where you send Pav *puts pinkie to mouth* ONE BILLION DOLLARS.
My current recommendation is solution 4. (Please note, this is not done in my professional capacity and purely as a joke, no liability is to be accepted for the aforementioned statement)
Goal 2: College fund (again, in future or current dollars. What college and what's your assumption for tuition increases?)
Solution 1: Section 529 plan. You (and family members) can sock away up to 11 grand per year into mutual funds, grows tax deferred, used for any qualified tuition expense, room/board. Until the EGTTRA act of 2001 sunsets in 2011 (unless Congress takes action), wiythdrawals will be tax free. But even if they're tax free, the tax deferred growth is to your advantage
Solution 2: Education IRA. Up to 3 K per year (increases with time), grows tax deferred and withdrawals are tax free for qualified educational expense.
Solution 3, open account using mutual funds/equities/bonds.
Those are the plans. The strategy? Long term out, should be more aggressive and invest in primarily euities focusing on mid cap companies.
Goal 3: retirement (present or future dollars?)
Since you want to retire past 59.5, a ROTH IRA works wonderfully for you. Tax deferred growth and tax free withdrawals. Can't go wrong. Also, depending on your income, you can get a tax credit this year for contributing. An awesome personal retirement option. Don't forget about employer plans too... Oh and investment strategy is aggressive, small, mid, large, foreign and domestic with a 85/15 equity/bond mix changing as you age.
Please don't use an open account for retirement. Just don't. It will eat away your money through taxes.
As for the actual funds, do your research. I like Wasatch, Franklin Templeton, American, Oppenheimer, AIM, MFS, Vanguard, and the small sector funds that kick the crap out of regular indices through short-selling.
You online? Early... prolly resting. Email/message me, we'll talk. Don't know what the world will do with all this turmoil. The stock market may not be the best solution, these are strange and different times.
Cheers !
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