Investor Profile: Starting to Invest

Name: Jenny Peterson
Age: 25
Occupation: PR Account Executive
Family status: Single, no children

Getting started toward a goal that's a long way off can be tough – even when the goal is as important as retirement.

That's the problem facing Jenny Peterson. In the three years since she finished college, she's been able to get her career off to a good start. With a comfortable – if not lavish – salary of $32,000 a year, she can keep up with her bills, make her student loan payments, and even afford an apartment in a good neighborhood.

Fitting retirement planning into her budget hasn't been one of Jenny's priorities, though. By the time she's done paying for the things she needs now – and putting aside $300 a month for a down payment on a new car – she just doesn't see how she can afford to set aside a few hundred dollars a month to spend decades from now.

Starting Early Pays Off

Ironically, it's the fact that Jenny won't need the money for a long time that makes retirement investing so important now. Investments made early in your working years have more time to grow and compound – so an early start can mean that Jenny will need to invest fewer total dollars for her retirement.

Her employer doesn't offer a retirement plan, so Jenny's eligible to make tax-deductible contributions to a traditional IRA. Anyone with earned income can contribute up to $5,500 a year to a traditional IRA, but those individuals who don't have access to a qualified retirement plan (or do, but have income that falls below a certain level) may deduct these contributions from their taxable income.

Making a traditional IRA investment would allow Jenny to reduce her tax bill now, as well as prepare for future retirement. Taxes on her IRA investment earnings would also be deferred until she started making withdrawals, as long as she followed the rules that govern IRAs.

Jenny also could choose to contribute to a Roth IRA. With this option, her contributions would not be tax deductible, but when she began withdrawing the earnings on her investments, they would be tax-free, provided that she complies with the guidelines for making withdrawals. Both traditional and Roth IRAs have advantages – your personal circumstances help determine which one is right for you.

Starting early is important – but where does a new investor find the money?

Just knowing her options isn't enough. Jenny needs to put some thought into starting her investment career today. Here are a couple of ideas:

  • Consider Priorities

    To set aside more money Jenny may need to consider making some selective changes to her budget. For a start, she may want to consider postponing her new car purchase until her income is higher. The $300 a month she's setting aside for it might be better spent on her financial future – that investment alone would bring her close to the $5,500 annual IRA limit. It's easy to let the desire for newer, expensive products distract you from longer-term goals.
  • Look Ahead

    A 401(k) plan is a valuable benefit – if your employer offers one, it will probably be your first choice for retirement investing. If Jenny is like most people just starting their careers, she's likely to change jobs in the not-too-distant-future. She may want to seek out future employers that not only offer attractive career opportunities, but also help their employees prepare for the years ahead. Remember: participating in a 401(k) plan does not prevent you from investing in an IRA.
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  • No Bank Guarantee
  • May Lose Value