Dear Market Watch,
I spent five years as a teacher in Missouri, which made me eligible for a small pension (less than $400 a month).
Teaching didn't work for me, and since I would never be able to return to the profession and increase my pension, I decided to cash out my pension and reallocate the money to something that would pay more.
I paid off some debt and then invested $6,500—the maximum amount allowed—in a Roth IRA. I'm 52 but don't plan on retiring for at least another 20 years.
Once I'm done paying my taxes, I'm not sure if I should put the remaining money in an IRA or invest it in index funds like the Dow Jones or Nasdaq. What is your advice?
Related: I am 73 years old, retired and taking my own RMD tests. But what happens if you become incapacitated and miss them for several years?
Dear reader,
I will answer your question with a question. Why choose one over the other when you can have both? Index funds are a popular choice for investors with IRAs, so there's no reason you can't add them to your Roth IRA portfolio.
For those who may not be aware, as the name suggests, index funds use indexes, such as the S&P 500 SPX.,
Dow Jones Industrial Average DJIA,
Nasdaq Composite, COMP,
Or many others, as standards. They're particularly useful for long-term investing, making them a good choice when your retirement is a couple of decades away.
When you have your retirement investment plans on the radar, but aren't sure where to start, look to target date funds. Managers link these portfolio funds to specific retirement years — for example, 2030 or 2055. If your retirement is in 20 years, you might look at a 2045 target-date fund. (Watch fees, also called expense ratios.)
I'm not a financial planner — specifically, not your financial planner — so I'm not offering specific investment advice. Any funds I mention here are simply to illustrate and explain how they work and what to look for.
Target date funds
Back to the target date fund. If you look at the Vanguard Target Retirement Fund 2045, VTIVX, you'll see under “Holdings” that half of that fund is invested in Vanguard's VSMPX Total Stock Market Index Fund, another 33% is in Vanguard's VGTSX International Total Stock Market Index Fund, and 10% is in The firm's bond market index fund VTBIX, 4% in Vanguard's international bond index fund VTILX, and 1% in liquidity. Take it a step further, using the Total Stock Market Index Fund as an example, you'll see the top 10 holdings include Apple, AAPL,
Microsoft, MSFT,
Amazon, Amzn,
And Nvidia. ran out,
Vanguard isn't the only company offering target-date funds or index funds. Other big names include Fidelity, Blackrock BLK,…
T Row Price True,
Schwab Show,
And American funds. You could spend a day researching their options and comparing collectibles.
Another option you have is to invest in a traditional IRA now if you're in a higher tax bracket than you expect to be in the future (although assumptions about tax brackets when they sunset in 2025 are not included). As your tax liability decreases, you can convert some of that money to your Roth account. Having a Roth IRA is a great retirement savings tool, and the diversification and taxability of your investments will make any choice you have in the future more robust.
Do you have a question about your retirement savings? Email us at HelpMeRetire@marketwatch.com
