Expert: Paul Henneman - 12/26/2007

Question
Paul,

  I am looking for some insight on how much to invest into my 401k and or Roth IRA. I am 23 years old just starting my career and retirement fund. My income is roughly 40k-50k and I am still living with my 2 landloards. My company does offer a 401k plan(they DO NOT match) to which I put away 7% per pay period twice a month. I am looking to open a Roth IRA for the taxable reasons and as well as divirseify my investments. My question to you is at my age and income what is the right amount or percentage I should be putting aside each check and should it be weighted more or less toward one or the other? Also, life insurance? Should I start now or wait till I'm married with a family? If you were me how would you invest your money and how much? Thank you for your time!

Answer
Mike,
   Thank you for your questions!
The simple answer to 'how much' is 'As Much as you Can!'! the more the better. The way interest compounds over time, even a small increase in your investments can result in a huge difference in the amount you have down the road. Since your company does not match, you may as well put as much into the ROTH IRA as you can, there is a maximum contribution of $5,000 a year from 2008 forward. If you can contribute more than that maximum, the rest could go into the 401k. In other words, since your 401k is taken directly out of your paycheck, contribute as much as you can to the 401k while still having enough to put the full 5,000 into the ROTH IRA if this is possible.
Live insurance is a very personal decision. The general purpose is to take care of your loved ones should something happen to you.  So, if you are not married and do not have any children, the insurance would not serve much purpose.  Perhaps the funds you would spend on life insurance are better used to invest into your 401k and ROTH IRA.
The 'how would you invest' question is more difficult. Every investor is different. You are definitely on the right track with your 401k and ROTH IRA, and at your age you have an incredible jump on most people. If you can make these investments a part of your life, and continue them for decades to come, you will do incredibly well.
The hardest part is to decide what exactly to invest in. The 401k and ROTH are both account types, you must still buy some sort of investment within those accounts. The 401k is probably limited in that your company has a list of approved investments to select from, so I probably can't offer much advice without knowing what those choices are.
But with the ROTH you can essentially purchase any stock, mutual fund, bond, or other investment. This can be very difficult. The easiest way to get started would be to purchase an index mutual fund. This is a fund that tracks an overall index, basically to copy overall stock market performance. The most widely accepted standard for this is a fund that tracks the S&P500 index, the most stable of the indexes. For example, Vanguard has a fund that does this with the ticker symbol VFINX. If you invest your ROTH funds in this, your performance should always just about equal the S&P500 overall performance.
To do better than that takes a great deal of research and time. You could start with the book "Investing for Dummies", it gives a good summary of most forms of investing and provides additional sources to do more research into topics you find most attractive.  Start with a general fund, and if you are a hands on, research oriented person, you can begin to look into other options to increase your returns while your initial investments begin to work for you.

I hope that this helps! My congratulations on thinking about this so early. Your investments have plenty of time to grow, and you will really begin to see your net worth increase as the decades go by. 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