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The 'Get-Started' retirement plan
We're in our 30s and have few assets -- where can we start investing our salaries?
October 3, 2005: 3:38 PM EDT
By Walter Updegrave, CNN/Money contributing columnist

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NEW YORK (CNN/Money) - My wife and I, 34 and 38 respectively, are estate managers for a property in Idaho. All our expenses are paid for -- rent, food, car, gas, insurance, etc. -- plus we receive $6,000 per month.

Other than a small amount of savings, we have few assets: no IRA, no investments, no house. We want to begin investing a large portion of our salary, don't know where to start. Suggestions?

-- Aaron G., Ketchum, Idaho

This is an ideal time for you and your wife to start cranking up your savings and accumulating some assets for retirement. Think of it. Most people must spend all or nearly all of their money on mortgage payments or rent, food, transportation and other necessities. (For a breakdown of how typical U.S. households spend their money, click here and open the Consumer Expenditures in 2003 report, which is the latest info available.)

But you've got all that taken care of for you. Which means you've got a great opportunity to save nearly all of your income -- except, of course, for the piece that will be siphoned off in taxes. So make sure you take full advantage of it and that you don't instead inflate your spending on discretionary items like travel, entertainment, new electronic gadgets, etc.

Sending money straight to investments

In fact, to be sure that this money goes directly into investments, I recommend you consider establishing an automatic investment plan. Basically, you go to a mutual fund company or investment firm and ask that they automatically direct a certain dollar amount each month or even every other week into one or more mutual funds.

In some cases, you can actually arrange to have the money taken right out of your paycheck, although your employer would have to be willing to cooperate for that to happen. But even if you can't do that, you can do the next best thing: simply direct the fund company to take a certain amount out of your checking account each month and move it to whichever investments you stipulate.

Virtually all mutual fund companies and investment firms offer this option, so you should have no trouble setting up such a plan. One warning, though. Whatever you do, you want to avoid a similar type of arrangement known as a "systematic investment plan," which charges big upfront fees. Those fees cut into your returns and make these systematic plans a lousy deal. To make sure you don't end up in this type of plan, check out the Investor Alert securities regulators issued on systematic plans last year.

And where to put it?

The next question is how to invest the money you're having pulled out of your paycheck or checking account each month.

First, you should make sure you have enough money tucked away in a secure investment such as a money-market fund to carry you for a few months in case you run into an emergency or you lose your current job. Basically, I'm talking enough so you and your wife could eat, rent an apartment and pay basic living costs until you found a new job -- say $10,000 to $20,000.

Once you've got this cushion set, you can begin to think about long-term investing. There, your goal should be not to find one or two funds that have been hot performers lately. Rather, you should be looking to build a portfolio of funds that can provide enough growth to build a sizeable nest egg over the next 25 to 30 years or so. That means that stock mutual funds should be the cornerstone of your portfolio.

On the other hand, you don't want to pursue an investment strategy that's so aggressive that you'll sustain such big losses during market downturns that you'll be tempted to cash in your chips at the worst possible time -- that is, after stocks have fallen but may be ready to rebound.

Allocation, allocation, allocation

For help with creating a mix of stock and bond mutual funds that makes sense given your age and appetite for risk, I suggest you take a look at our Asset Allocation tool. This will give you a good idea of how to divvy up your money between different types of stock and bond funds so you have a good shot at long-term growth without getting totally creamed by bear markets in the short-term.

As for choosing specific funds to invest in, I have two suggestions. First, you can check out the MONEY 50, a group of 50 funds recommended by MONEY Magazine that have solid performance, reasonable expenses and a history of treating shareholders fairly. This roster of funds also appears in each issue of MONEY.

The second way to go is to choose what's known as a target-date fund. You pick a fund with a date that roughly corresponds to the year to plan to retire -- say, 2030 or 2035 in your case -- and you get a portfolio that has a diversified mix of stocks and bonds appropriate for someone your age. What's more, that stocks-bonds mix automatically becomes more conservative as you get older. In short, you don't have to do much other than pick the fund. For more on how these funds work and what you should know about choosing one, click here.

One last thing: You certainly want to leverage your savings effort by participating in any tax-advantaged savings plan you can. At the very least, you and your wife likely qualify for either a traditional or Roth IRA. To compare the two, click here. And if you and your wife are paid as self-employed workers as opposed to being on a payroll, you may also qualify for other tax-friendly savings plans, such as a SEP-IRA.

But the single most important thing you can do now is to start saving ASAP. Because unless you do that, even the best investing strategy in the world can't help you achieve financial security.

Walter Updegrave is a senior editor at MONEY Magazine and is the author of "We're Not in Kansas Anymore: Strategies for Retiring Rich in a Totally Changed World."

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