How to open a retirement account with $50

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After I wrote The World’s Easiest Guide to Understanding Retirement Accounts, I got a bunch of emails asking about the fees to open a retirement account. It’s true, lots of places require you to fund your retirement account with $1,000 or $3,000 to get started (e.g., Vanguard does). But there are other options. Summer writes:

I actually just started my Roth IRA with the T. Rowe Price Retirement 2040 fund a couple weeks ago. It’s so easy! Plus, with automatic allocation, you only need $50 a month to fund it (no coming up with the $1000-$3000 up front).

I don’t own anything at T. Rowe Price, but I’ve heard good things about them from a number of people.

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14 Comments

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  1. The minimum investment has always slowed me down from starting up an online trading account.

    Does anyone know of a similar program at a Canadian bank or trading company?

    NG

  2. I am using T. Rowe and Sharebuilder.com both right now.

    I’m buying PREIX via T.Rowe, and SPDR via Sharebuilder.

    I know converting to one or the other is the right thing to do, but currently, I’ve not had the time to do the math to figure out which cost structure is actually lower.

    (If anyone else does, tell me please)

  3. This is such a good point.
    Back in the spring, my younger brother (who is just finishing college and getting a job) came to me asking to borrow a few hundred dollars. I told him the only way I’d give it to him is if he opened an IRA and instead of paying me back he could put the money in there. We talked about it and he got the T Rowe Price TR2045 and set up the automatic $50 deduction from his bank account. I even sent them the first 50 bucks to open it up.
    I don’t own any T Rowe Price funds myself, but I am impressed by their low entrance barrier and I think they have a good selection of funds with reasonable ERs.
    I would recommend to anyone looking to start saving to check them out.

  4. How do I factor the expense ratio into my decision? For example, the T. Rowe Price 2035 fund has a ratio of .76% and the Vanguard 2035 fund has a ratio of .21%. Do I just multiply that ratio by the amount the fund increased that year to get my yearly fee? Say I start with $10,000. At the end of the year, the value is now $11,000. 1,000*.0076 = $7.6. Is that right?

  5. My Roth IRA is with Fidelity. They let you open one up with $0 balance as long as you sign up for automatic contributions. I’m pretty sure the minimum automatic contribution is $100 though.

  6. For the expense ratio question, you’d multiply it by your total assets. So $11,000 at the end of the year at a 0.76% ratio would be $83.60 vs $23.10 with the Vanguard fund.
    So over time, the Vanguard fund can offer a big savings. Another thing that isn’t included in the expense ratio is trading costs, which are shown in the fund prospectus as a percentage of total assets also. This also reduces your return.

  7. I just opened one this month as well at T. Rowe Price. I am investing in the TRREX since I am lacking this sector in my 401k. I really like the user interface that T. Rowe Price has. Much better than my Fidelity 401k.

  8. i’m 45 now, income now 30k
    in 25 yrs what amount of income
    would i need (basic living)?
    any responses welcomed.

  9. I have a T. Rowe Price account, and I really like it. My fund is not a retirement fund, and it’s relatively conservative, but it was the first one I bought when I had a little extra money to burn at the end of the month. Trust me: You won’t miss the $50 automatic deduction. I don’t, and I enjoy checking in on the fund online just for fun to see how much more I’m making than if I had spent that $50 on vodka tonics or something similarly frivolous.

  10. Thanks for letting me know about this, Ramit. I’m one of those that emailed you about it.

    Although, I really want to go with Vanguard, so I think I’ll stick with my plan of saving up $3,000 in a savings account to start a fund.

  11. Ramit, you might find the situation in Australia interesting:

    http://en.wikipedia.org/wiki/Superannuation_in_Australia

    I guess it’s like the 401k thing, but it’s compulsory for everyone who is working. Your employer has to make a contribution equal to at least 9% of your annual salary. You can also sacrifice an unlimited amount from your salary to go straight into the fund.

    Contributions taxed at 15% instead of normal rate, 15% on earnings, no tax on withdraw if it’s taken out as a lump sum.

    Its a good system because it creates forced savings. Most people already have savings accumulated at 16, 17 from part-time work that can’t be accessed till 55.

  12. I own 2 T. Rowe Price mutual funds. They recently updated the account user’s page and I absolutely love it. Opening an account online is very simple (an even easier when you open an additional fund account). I have mutual funds at three other companies and T. Rowe Price is my favorite based solely on online access. Out of my other three, I think that Fidelity is the worst.

  13. Hello. I recently started reading this blog. I’ve gotten some really awesome information, but I have a question. Right now, I have 2 avenues of savings for the future. I have a savings account that has a 5.05% apy and I invest in the stock market. My question is, should I keep my money in this savings account or would it be better to open a retirement fund like the ones mentioned above, or maybe split the money and do both. Any feedback is greatly appreciated, Thanks!

  14. Lorena: In my opinion, and I’m no financial advisor, you need both. The savings account should be your emergency fund, you should have enough money in there to live, at a minimum, for 4 months should something happen to your job or otherwise.

    The retirement fund should be opened for your future. The earlier you start, the better – and this point is huge. The interest and compounding gained by starting early is immense. I will also say I’m a huge fan of T Rowe Price funds and their service. I would recommend them to anyone for their mutual funds or retirement funds.

    Once you have a solid foundation in both of these, then start looking at other investments – maybe short term or long, depending on your situation and where you see yourself in the next 10 years.

    My .02

    -Jeff