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Got the Roth IRA: Now what?

Question: I'm 25. After listening to your show, I decided, Hey, I ought to start saving for retirement, so I opened a Roth IRA. 

Now my question is: Is that it? Do I just put money in there and it grows? Or is this the type of thing where, once it's created, I then have to allocate the money in there to various investments? If it's the latter, what the HECK should I direct my first investments toward? Love the show, cheers! Sam, Concord, NH

Answer: Congratulations for opening up a retirement account. I'm glad we encouraged you to create a Roth IRA. And no, that isn't it. You'll want to decide where to invest the money. It could turn out that the best investment for you is where the money is currently parked. However, it could be that you'll want to build up a diversified portfolio with a mix of investments, ranging from U.S. stocks to international equities to fixed income securities. 

What matters at the moment is that you opened up the account. Time is working in your favor. For example, let's say you put $3,000 a year into your Roth until age 65 and you earn 4 percent a year on your money. When you retire, you'll have accumulated more than $296,000 in the account. Had you waited until age 35 to open your Roth, you would have only around $175,000 in the account (again, assuming $3,000 annual contributions and a 4 percent rate of return). That's a difference of $121,000! 

There's no reason to rush into an investment strategy. That's a formula for suffering a bad case of market whiplash. Instead, take the time to make an informed decision. In the meantime just keep on adding to the Roth. (The limit on annual contributions is $5,000.)

To decide where the "HECK" you should direct your investments, I would look at yesterday's post, Bookshelf Recommendations. Any of those books will help you figure out a good investment strategy for you.

About the author

Chris Farrell is the economics editor of Marketplace Money.

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