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How to Build your Ideal Retirement Account

RetirementIf you follow my blog for some time you may know about a few options of how to build a retirement account if you just started and have little money to invest. I tried all of those options I wrote about and all worked well. Some methods were closer to my risk tolerance or patience tolerance or both, some of them I didn’t like. But that doesn’t mean that they won’t work for you. It’s up to an investor to decide and try on his own which way would be the best.

One option I mentioned in the past was building a retirement account using Non-transaction-fee (NTF) mutual funds. The principle is that you open a retirement account with your broker or a financial institution and start contributing a small amount of cash every month. Then you buy your NTF mutual funds for free and these funds then work as your savings account within your retirement account.

The second option I wrote about was similar to the above mentioned mutual funds, but this time you use non-transaction-fee ETFs. The principle is same as before. Buying and selling those funds cost you nothing and your money are not idle in your account. They make you money.

If you are, however, a very conservative investor and don’t like a chance that your investments can lose a value right at the time when you are ready to sell and reallocate into a different investing vehicle – such as dividend paying stocks, you may like a third option how to build a retirement account with small money.

It is a very simple method and I actually used it (and still use it) myself.

Open a savings account

It is that simple. You open a savings account with your bank (some investing banks or financial institutions which are also providing retirement accounts can offer you a retirement account and a savings account within the same product as a package) and start saving your small monthly contributions in your new, fresh savings account. All you have to do before you open an account is to go for a hunt and research the best savings rates you can get on the market. Once you find out the best rate you can get open an account and start contributing your monthly contributions. It can be as little as 20 a month or 50 a month or whatever you can afford.

Automate saving on regular basis

I bet you have heard this advice many times. It is still a valid advice and it is an alpha and omega of succesful saving and investing. If you want to make money in the stock market, you have to save first.

The best way to save money is to set up an automatic transfer from your checking account to your new savings account. I do this not only when saving for my investments, but also when saving for my recurring bills as I wrote in my earlier post about saving money. The transfer happens automatically every month without your influence and forgetting memory (at least mine is). You won’t be double guessing or making excuses for “why you just need the available cash so you cannot transfer it”.

Open your retirement account

BankNow when you have your savings account up and running, go for a hunt for the best retirement account. The US, Canada, and UK offer many options for retirement accounts. If you live in UK you can go, search and discover savings ISA options best for you and open an account with the institution which provides it. ISA accounts are tax-free providing the best growth opportunity for your retirement account compared to taxable accounts.

Once you find the best account, open it and here comes the second part of retirement account building phase.

Transfer funds from savings account and invest

Once you save a reasonable amount of money (I usually save 1000 dollars as a minimum investment) transfer it from your savings account to your retirement account. Then you can invest it into your favorite stock, such as a monthly dividend paying stock. In many cases you will be able to set up automatic transfer too or at least start a transfer once you reach the desired amount without transferring checks.

It is a simple way to build a wealth and almost 100% automated. As an engineer I like when things go according to a plan and exactly “per manufacturer’s installation instructions”.

Benefits?

The best this method can offer is security. During your savings phase you won’t lose a value of your savings as in this phase you do not take part on the volatility of the market. It may be a good option if you are a risk averse investor. Bear in mind that the savings period may take some time. It will not happen overnight. It may take a year before you save enough to invest in stocks. During that period you have your money secured and making you a small profit.

You can also go further and once you invest your first “lot” of money you can transfer remaining funds back to the savings account if the retirement account conditions and rules allow it. You will never be able to invest the exact amount and the left overs can be moved back instead of leaving them idle in the retirement account.

 





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