Dear Liz: I am 25 and work part time while I finish my bachelor’s degree. Most of my family thinks the amount I could contribute to a retirement account is too little to bother with opening one, but I would like to get into the habit of having the contributions. I would be contributing only about $25 a paycheck (every two weeks), and this is an optimistic estimate.
I do have about $4,000 in savings right now. Do you think I should go ahead and open an IRA? If so, what should I be looking for in the bank or investment company with which I open the account?
Answer: There’s really no such thing as “too little” when it comes to retirement savings. Everything you set aside can help you on your journey to financial independence.
Furthermore, waiting until you can contribute more is a bad idea, since your expenses will probably rise over time and you’ll always find ways to spend the money if you don’t make saving a habit. Start with those $25 contributions and try to bump up the amount every few months. Once you graduate, look for a job that offers a good workplace retirement plan that will allow you to contribute 10% to 20% of your earnings — preferably with a company match.
For now, though, opening up an IRA or a Roth IRA is a great idea. You may be able to get a tax credit for your contributions if your modified adjusted gross income is below $27,750. (You can learn more about this saver’s credit by reading Publication 590, Individual Retirement Arrangements, or the instructions for Form 8880, Credit for Qualified Retirement Savings Contributions.)
Avoid banks and full-service brokerages, as their hefty fees will eat heavily into your returns. Instead, start with an account at a company that offers low fees, such as discount mutual fund company Vanguard Group or discount online brokerage ShareBuilder.
Vanguard has a $3,000 minimum investment requirement on most accounts and a $100 minimum for additional investments, so you’d need to save up in another account (such as an online savings account) and transfer the money over when you have enough. If you choose its target date retirement funds, though, the minimum is only $1,000 with a $1 minimum for future automatic investments. ShareBuilder allows you to invest without minimums. Automatic investments in certain mutual funds are free, while automatic investments in other funds and stocks cost $4 apiece.