Expert: Paul Henneman - 9/22/2007

Question
Hi Paul. I am a 21 years old college senior. I am extremely interested in investment and finance and want to start early to save for an early retirement(my goal is to retire at 46, also buy a 45k car before age 28). I  currently have two accounts for investment:

1. An individual account with sogoinvest- I plan to put away $2500 here and invest 40% in emerging markets ETF, 30% in CEFs: MXF and IFN, and 30% in domestic blue chip stocks. I plan to put $100 or more this way to build a less aggressive portfolio after I graduate and have a steady job.

2. An individual account with T. Rowe Price- I am putting away $50~$70 monthly in a no-load, no fee New Asia Fund. I also plan to increase the amount after graduation.

Assuming I have to retire at age 45~50, I am pondering about the tax consequences. At which brokerage should I open my IRA account, and which one to hold a fully taxable account,if any at all? (I am aware of the 10% early withdrawal penalty) I want to know if the penalty will actually make it better to not to have an IRA at all (maybe the penalty diminishes the tax advantage altogether?)

Please give me some insights, thank you!

Sam from UCLA

Answer
Sam,
   Thank you for your question!
I think your overall plan may be a bit agressive, but your current investments are well thought out and fairly diversified. Good job on structuring your investment portfolio.  To reach your goals, you will need to ramp up your contributions as much as possible.
   There are many good brokerage firms out there. The ones I generally use myself are www.FOLIOfn.com, www.Scottrade.com, www.Ameritrade.com, and www.ETrade.com  but I don't think there is a whole lot of difference between them.
  My only advice to you is regarding your IRA account. I strongly suggest that you reconsider and do not make any plans to withdraw that early. The penalties are too much, and keep in mind that you will still need funds to live the lifestyle you are interested in for many, many decades after you plan to retire. I would suggest that you think of your investments in two stages. The first are the individual accounts you set up. Do your best to grow these accounts, to generate the funds you need to accomplish your goals.
  The IRA should be seperate, a 'fallback' if you will. Things don't always go your way. Even if they do, keep in mind that inflation will take a big piece out of the buying power of your money as the decades go buy. If you have a new source of income that you access after you turn 60, this will more than offset inflation, and make sure that you have the funds you need for the last third of your life. Keep in mind that life expectancy continues to climb, if you stay healthy you could enjoy another 30 years after your IRA becomes available with no penalty. That is a long time that needs to be accounted for.
  In addition, the current maximum contribution to an IRA is $4,000 a year (goes up to $5,000 a year in 2008). Consider maxing that out, and anything left over goes to the individual accounts. As you say, your income will increase after you graduate, so this will quickly become possible for you.

Congratulations again on your early start. Investments take time to grow, and by starting so early you have given yourself the headstart you need to reach your agressive goals. Best of luck to you, and please do not hesitate to follow up with me if I can be of any additional service.

Sincerely,
Paul Henneman
President
ValuEngine Inc
www.ValuEngine.com