What would you do in my situation?

Hi TW, I know there are a plethora of threads here about stocks and I could probably browse through them enough to gather all the information I need, BUT I want to give you my situation and see what you can suggest for me as you have for others.

I am 20 years old as of December and I'm in my 4th semester of studying Mechanical Engineering at a University renowned for engineering and surrounded by chemical plants. I have one internship under my belt and another lined up next year. I am expected to graduate with a job offering close to $80,000 starting out based on my current internship salaries. I earned just above 10K last summer (40K/year internship) and expect to earn 15K this summer (63K/year internship) and so on for the next summer. I consider this sensitive information but I think it is appropriate in this section.

Here's my pay breakdown.
10% tithe
21% tax (variable)
69% left for expenses and savings. I figure I can save around 40% each summer and live happily with the rest for costs and play.

Last summer I invested 5K of extra scholarship money (because I am on a full ride academic scholarship) and 5K more from my paycheck for a total of 10K invested in stocks right now. I gained 2% last year and plan to gain 6% this year with some new stocks I'm looking at.

I currently plan to retire around 40-50 and continue part time work After reading all of your replies I think I will be retiring closer to 60. You are right, there will be more expenses than I considered intially and I will need a lot to live on if I won't be working anymore. I also want to have children as late as 30 which by that time I should have their expenses paid for. I plan to purchase a small first home sometime after graduation and later rent it out to buy a second home. I have minimal costs and my parents are very generous and supportive. All I have to do right now is focus on my grades and internships.

So given my situation, what would you do if you were in my shoes? When and how should I start an IRA or 401K? I don't know much about them at all except for their definition. My advisor suggests I stay away from bonds and has me looking at growth stocks. I am very blessed to have everything that I have and I honestly think I am as set as can be but I still seek advice from the community. Like I said I do not think it is appropriate to talk about my scholarship , my job, and especially my investments on the forum, except for in this section right here.

Also, I drive a 2007 Tacoma with 110K miles so I shouldn't be needing a new truck any time soon Thanks everyone for reading and I really look forward to your responses.
Updated OP with questions from first round of responses:

1) Where and how can I start an IRA? Is it something I do through a bank, investment firm, the government?
2) Is it true that I can only contribute 5.5K/year to it and it's best to make after tax contributions so my returns are tax free?
3) Is it also true that I am limited to 18K/year 401K contributions? I thought this would be regulated by my employer and not a national standard?
4) As a general rule, what is a common or respectable percentage of one's income to save/invest? I am guessing between 20% and 30%?

Thank you all

 

Why would I need 5 million?? For what? And why would I not be able to invest scholarship money if my education is paid for? It went straight to my bank. Thanks for response.

 

I know lots a guys who could retire who are 60 ish but because they will have to pay for their own health insurance after retirement they are holding off. Retirement at 40 - 50 years old would require one's salary to be considerably higher than the average person.

 

Are you talking about retiring with a pension through your employer or just through savings? I am not super familiar with private/civilian retirement situations. After 35 yrs of working (I will be 55) I will have an indexed 70% pension for the rest of my life. I am not in a position to be investing money rightness but haven't worried too much about it. I figure if I can be mortgage-free and be making 70% of my salary I can make it work.

All that said, will your career afford you a goo pension or are you going to be relying on your own investments and savings?

 

Your ability to retire at 40-50 will depend on how frugal you are with your money (starting now), kids, what level of income you expect during retirement. Do some online calculators on retirement. You can fill in your info there, and it will give you an idea of what you might be able to expect if you retire at that age. You will get an idea of how much you need to save now to retire then.

Also, having a kid will change everything.

 

Disclaimer: this is for informational purposes only and not intended as investment advice or a recommendation or solicitation of investments

Find a broker you like, I prefer Fidelity or Vanguard (I use Fidelity). Call them to make sure you are eligible to contribute to an IRA or a Roth IRA with your type of income since there are restrictions. If you can not invest in an IRA then you can open a brokerage account. It's free at Fidelity, no min. balance, no fees for anything other than a real Wire transfer. EFT's(electronic fund transfers), checks, BillPay, AmEx 2% cash back Credit Card, ATM card are all free and they even rebate ATM fee's no matter how much they are with no limit, which is amazing. Then as far as investments go it depends on how much you want to be hands-on, basically do you have the will, skill, and time to invest your money on your own. Sure you can try to buy individual stocks but I think that would be a huge risk and you really need to be able to do your own research (or pay for research that you trust) otherwise it is extremely risky to own individual stocks.

I agree with Warren Buffet's advice to LeBron James, stick with index funds!!!! Vanguards index funds are typically the cheapest, but since Fidelity offers iShares ETF's for no commissions (as long as you don't sell within 30 or 60 days or they charge you $8 to sell, otherwise no fee to buy or sell) and IVV the iShares S&P500 ETF is only 7 basis points per year (0.07%) or $7 per year on a $10,000 investment, basically nothing!!! Vanguards is cheaper VOO is 5 basis points/0.05% or $5 per year. But with a Fidelity account you'd have to pay a commission every time you buy and sell so I prefer IVV since I can buy literally 1 share for ~$209 or whatever the current share price is with no commission. This allows me to invest in small increments and really reduce my expenses which over 30-40 years of investing really pays of in the end!

Also Bonds aren't that bad even if you are young. There are studies that show over the long term a blend of 65-70% stocks and 30-35%bonds produces superior risk-adjusted returns. I personally like the ETF PFF for investing my excess cash (preferred stock - a hybrid between stocks and bonds) because it stays between $38-$41/share pretty consistently and pays about 6.5% per year in dividends. Make sure you learn about ex-dividend dates and how these types of ETFs work before investing. The mechanics of how an ETF declares and pays it's dividend is important. I like to buy PFF after it goes ex-dividend, usually a few days after is when it hits its low point for the month and then it'll start rising again as it gets closer to paying the dividend (which it pays every month, you get a portion of the total 6.5% you'll get if you own it for a full year) once it goes ex-dividend the stock price drops to compensate for the fact that the fund just paid out a bunch of cash to shareholders.

A lot of information on Fidelity's website which is free once you open an account, and opening an account is free and you don't even have to fund it to open the account. The website makes you think you need to fund it before you can proceed but you can click past the funding section and return to it later (or never).

You can call Fidelity and ask for advice but if you are investing less than $50k they'll tell you to invest in their Freedom funds, which is a target date mutual fund. It is designed to be the "only" investment you need, but it has high fees so I prefer my cheap index funds, mixed with some more interesting smaller investments that I am taking more risk on with (but are still funds not individual stocks). I can't stress it enough how much time and effort it takes to invest in individual stocks and actually perform better than an index fund, some of the smartest people in the world can't do it consistently.

 

When should you start a 401k? NOW. And put in as much as you can afford, especially if your employer matches your contributions.

 

As far as 401k or IRAs, do both, and start as soon as possible. This is their power: compounding interest over the long term. The sooner you start, the better and faster it works for you. You can never make up for that lost time early on in life.

The special power of 401k is an income tax break (initially, but its real power is when the employer matches contributions. This is free money. There isn't much of that in the world. Do not leave any on the table. Contribute at least whatever is required to get the full match from the employer.

The special power of Roth IRA is that growth (annual increase in value, or gains) and all distributions are tax free.

 

high tech growth funds ira. do it now and forget about it till you're old and grey.

 

Index funds, i wish someone told me about these earlier. My family owns a stock and bond trading company and i had to learn about them on PBS, bastards lol!!

 

at 40 or 50 he won't be old and grey

 

I am , lol

 

I think you have several great suggestions listed above. Invest as early and as much as you can and take full advantage of any matching offered. Additionally, at your age (I assume your younger) I would invest in more aggressive index (or mutual if the cost are low) funds at least until you have a substantial enough amount to pick and choose individual stocks. I'd still keep the majority in mutual and or index unless you're a Wall Street insider.

As far as early retirement. With very few excpetions, you'll pay a penalty (10% as of right now) if you take a distribution from your 401(k) prior to the age of 59 and 6 months. Futher and not to rain on your plans but, you'll need to live a VERY frugal life to save enough to retire at 40 to 50 years old. $80k sounds good (and is) but, it won't go as far as all of us hope with kids, house, wife etc etc etc....

 

Being an engineering major, he won't have to. I know multiple people that are graduating within the next two years for engineering that already have job offers starting out 70-80k a year.

Edit: Personally, I have about $12k in a mutual fund right now. It brought roughly 8% year before last, and about 2% last year. As of right now it's not doing so hot but it has done me well so far.

 

retire by 40-50? 50 if you're lucky...I think you are overlooking A LOT of things. I'm not in your situation so I don't know what kind of things you pay for. My parents were a big help while I was in college too. Real world tip #1: Theres a ton of things you have to pay for that you never even thought of.

First off, when they say you can get an 80k a year job, they mean it can grow to 80k. Rarely is that a starting salary.

Granted, I lucked out and started at 78k out of college.

Now consider housing, depends where you are but its a big expense. Cars, furniture, upkeep, etc etc etc. Gonna drive a 30 year old car just so you don't have to keep working? Kids cost a TON. Are you going to pay for their college? Probably not if you're retiring so early I assume.

Spouse...what if they have student loans? My girl of 5 years (who I'm probably stuck with forever) will be done in grad school in about a year... and have 100k in debt.

I'm retiring at 55...but thats only because I'll have a 90% pension and a pretty solid retirement account.

But good luck, dream big.

 

Okay everybody, thanks a lot for the responses. I am going to reply to people who either had very specific advice or directly questioned my circumstances so we are clear. If I didn't mention it, I am 20 and in my 4th semester of Mechanical Engineering.

I hear not many companies do pension now days but I do plan to retire via a company plan and perhaps some savings. I wanted to join OCS but decided that since I want to have kids, it may be best that I don't take a full time career in the military. I'm not judging anyone who has done that, but I have seen first hand some friends whose relationship with their fathers is lacking because of time spent away from home and not to mention, moving schools. For this reason I want to join the National Guard or Reserve after college for 4-6 years and right about that age is when I want to have children. It's all up in the air right now though so don't take that statement to heart. But boy would that retirement be nice. For that reason I want to look not just for oil company careers but also DoD and the like. I agree, 70% forever seems like enough for me.

Phew, okay, you've given me a lot to work with here. As for Fidelity or Vanguard, I actually have my account with Edward Jones and my initial investment was subject to their awful 5.75% fee. I have since learned to invest monthly to only pay 2% fees which I am okay with. Those investments are in a mutual fund and in a stock I suggested that was approved by my advisor, both have done quite well and I'm happy to own them. We're taking a break from those and looking at some more individuals that pay 5.xx% dividends which to me, seems like free money. Whether it goes down or up you get paid more than the bank will give you. That's awesome!

I opened a Scottrade account on my own to "try my own hand" at investing and am currently WAY in the red. Goes to show you how good I did at research I guess. But what happened was I bought a natural gas stock right before Gas prices dropped to record lows so I am confident it will come back up. I most likely will not go with another company because my adviser has steered me well so far. However what I might do is once my Scottrade reaches the black again, switch those funds to Fidelity or Vanguard because the no fees you mentioned sounds nice. I can't invest small amounts with Scottrade because of the $7 trade fee. If I invest anything less than $140, I am paying 5%!

I don't think I can start a 401K until I graduate and sign on a full time job can I?

I think I will be able to start both of them once I start my full time job at 22 unless I'm corrected here shortly. Yes I am aware that the company matching is free money and plan to take advantage of that!

What do you mean? Can you tell me what a high tech growth fund IRA is?

Lol wow we would have to have some words if that was my family. I'm one of the first in mine to start investing.

At 40 or 50 I'll be happy if I have any hair left.

Normally I agree with you but my first internship was 37K/yr and this next one, knock on wood, is 63K year which is "junior pay". I imagine senior pay is at least 70K/yr and graduate pay I do expect to be around 80K/yr if I perform well this summer.

**I do not make the yearly salary. I make 3 months worth of it in the summer.

I agree with you. After reading everyone's responses I do not think I will be retiring at 40 or 50. Probably 55 at the earliest IF my finances allow. I may just retire at the same age as everyone else unless I get a gov. job.

And as I said in the previous response I truly think I will start close to 80 and grow to 100+.

I want two children and I plan to have their college paid for by the time they graduate HS. I'll be making enough to where the only way that I can't afford their college is if I have been too selfish or irresponsible.

PM inbound about that last thing you mentioned
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Thanks everyone for such great replies. After considering them I do not think I will be retiring as early as initially planned. I will update my OP with some more questions:

1) Where and how can I start an IRA? Is it something I do through a bank, investment firm, the government?
2) Is it true that I can only contribute 5.5K/year to it and it's best to make after tax contributions so my returns are tax free?
3) Is it also true that I am limited to 18K/year 401K contributions? I thought this would be regulated by my employer and not a national standard?
4) What is the "goal" of investing? Am I waiting until I retire to pull these out, or just until I make my next and first large purchase such as a home?

Thanks again.

 

I'm gonna give you a little different advice than anyone else.

First, 401k and IRA are not an investing strategy - they are a tax management strategy.

Now, while you're in school you're in a *very* favorable tax bracket and you don't gain much by putting money away tax deferred. Arguably, if you're successful, you'll actually be in a higher bracket when you retire than you are now!

Yes, the compounding investment income grows tax free, but it also locks up your money until retirement. And that might NOT be what you want. Why not?

Because most successful folks have THREE key pillars of their retirement:

1. 401k/IRA investments.
2. After tax investments. and....
3. Owning your own home.

In order to be successful at 3 - you need to (or should) put up as large a down payment as possible. Where will the money to do that come from? From after-tax investments.

Most younger folks focus first on investing in their home (real property) then once they've got that established - THEN they start socking away money (before tax and after tax) towards a retirement nest egg.

 

Some good points, Steve.

I will add though, that yes while 401k/IRA are also considered tax strategies, the real value/advantage of these are contributing early enough to take advantage of compound interest.

You know as well as I do housing is extremely expensive in CA, and it may take a while for a young'n to save 20% down (assuming they don't want to go FHA). If one starts contributing in their early 20's, a small contribution (say 5%, before company match) will compound to a very large figure when said individual retires, but will not take away so much they couldn't also save for that down payment. If that same person starts contributing in their 30's, they would need to contribute at least double to maintain that same compounding power.

 

Sorry i have to LOL at retiring at 40 or 50 and having multiple kids. I don't see that happening until you sell your first internet company and rake in some consulting fees.. I remember those days of being wide eyed and had the world figured out right before I graduated, then reality hit!

Right out of school start investing to buy a house, and dont believe the salary predictions your school says you will be getting, shave at LEAST 25% off that. New cars and trucks look cool, but owning your own house is typically an appreciating asset and more worthwhile purchase. My wife and i bought our first new car ever this weekend and we have both been out of college for 10yrs now (i just shed a tear typing that last part).

Like others have said always reinvest those dividends to take advantage of that compounding effect!

Are tithe's tax deductible? If not I would drop that and save that towards a house or invest it, then again that's just my personal opinion.

 

So the first bit, it seems like it's still up in the air on whether or not I should choose ROTH or traditional for the 401K and IRA? And I don't imagine there is anyway to change it after I start. Perhaps ROTH one and traditional the other to even things out? Yes, I am in a very favorable tax bracket but that's because I work 3 months at a high tax rate on my check then get a lot of it back because it's spread out over 12 months on my return.

Is there an advantage for taxes just by being a student? If so I'm unaware.

So I'm a little confused, you say the reason contributing BEFORE tax is because of those 3 reasons, and one of the reasons is "After tax investments"?
So when putting down as large a payment as possible on the house, does this mean I should pay cash if I could afford it? (Slim chance I know but for the example)

And by saying that comes from after tax investments, you're saying my current stock account is aimed at buying my house and then starting over?
Lastly, if I started 401K and IRA AFTER owning a home, (say 24 or 25) wouldn't that be losing those early years of compound interest everyone is egging on?

Thanks for the advice

That's what I was thinking. What is FHA? Housing in Texas is cheap compared to other areas.

Go ahead, lol it up. You are forgiven Like I said I don't think I will be retiring that early anymore either. I don't think I have everything figured out else I wouldn't post here AFTER the thread I will know everything.

I mentioned it earlier but I don't see any need to shave off 25% of my expected graduation pay when I am currently making 78% of it as a Junior and will be making more as a senior, more as a graduate etc.

Like I said I'll be driving the Tacoma for a long time and that's one of the many reasons I don't mind spending money modding it. Congratulations on the cars to you both!
Tithes are tax deductible but even if they weren't, dropping them is kind of against the point. I know they are a "drain" on my savings. Thanks