Devoted to understanding the basics and fundamentals of investing

Easton is 25, saves 10% of his income and is saving for his first house.  Bill is 50 and his wife is 40.  She just started her first IRA and Bill has a 401(k) that he got a late start on.  Both would like some advice.  This is a perfect opportunity to compare/contrast investment strategies given age differences.  I'll write about Easton today and Bill tomorrow.

Easton, you go dude!  Starting savings so early is the surest way to succeed.  Saving 10% is wonderful.  I hope you are putting your savings in a Roth IRA.  Since you are paying with after tax dollars, you can withdraw your principle after 5 years.  All IRAs allow you to withdraw earnings to pay for a first house. 

For a regular IRA you would have to pay taxes on your withdrawal at ordinary income rates.  The withdrawal would be added to your income for the year and the tax rate calculated at the combined figure. 

With a Roth IRA the earnings would come out tax free.  Since it is for a first house, you would not pay a penalty in either case for early withdrawal. I'd consult a tax professional to make sure you comply with all necessary regulations.

A Roth IRA allows you to accumulate earnings that are tax free.  Not just tax deferred, but tax free.  Also, although you can begin withdrawals of earnings without penalty at age 59 1/2, you don't have to and unlike regular IRAs, you aren't forced to make withdrawals at 70 1/2 if you have sufficient income from other sources.  This allows the assets to continue accruing earnings.  You can leave a Roth IRA to your heirs as well.

If your wife has an income, she should open a Roth IRA as well.  If she does not work outside of the home, perhaps you could hire her to do work for you such as editing, posting, monitoring sites, etc.  It would give you a deductible expense on your taxes and would enable her to save as well.  Make sure a tax professional blesses your plan to ensure compliance with all IRS regulations.

You can open a Roth IRA at any of the discount brokers, your bank or credit union.  I would do it at a discount broker. 

Since you are saving 10% of your income, you will have more than you can put in a Roth.  I would also allocate some of your savings to college and open a 529 account or a Coverdale College Savings account.  Utah has one of the best 529 accounts in the country. 

I assume you want to buy your house in less than 5 years.  You do not have time to ride out a business cycle.  As such you should limit your equity exposure.  Any stock market exposure you have should be to low beta stocks that fluctuate much less than the market average volatility. 

With interest rates rising now, most of your savings for the house should be in money market accounts or short term Certificates of Deposit with one month terms that you can roll into a higher rate each month.  You can lengthen out the term when the fed stops raising interest rates. 

Your retirement savings can be much more aggressive.  Since you have 40 or 45 years to the traditional retirement age of 65 or 70, you can ride out many business cycles.  I would have almost all of my savings in the stock market.  I've written on how to diversify a portfolio so I won't go into that here. 

Easton, tell me more about your goals and circumstances and we will use it to give some generic advice like today.  This post like all posts in this blog is meant to be educational and general in nature.  Before investing, consider consulting a professional investment advisor. 

Congrats Easton, now go out there and make some money.