American Funds and my Roth IRA

Once my daughter moved away to college, I was able to begin saving for my own retirement. I took advantage of the 401K plan offered at work for the value of the employer match, but I have a relatively small window of time left to build up a giant nest egg for myself, so I started looking into IRAs to supplement my 401K. My company doctor told me, "Our 401K plan is garbage. Put all of your money into Roth IRAs. Beg or borrow the money if you have to, but take advantage of the Roth IRA. It's the best investment vehicle that's ever come out."

I'd never heard of a Roth IRA before, and I wasn't quite sure how to start one. I've been with the same bank for over 25 years, so I went to my bank for advice and more information about IRAs. And my bank set me up with my current financial advisor, who has his office desk right beside the bank manager's desk within the local branch office. The information and advice and realistic budgeting plan outline for reaching my own retirement goals was free of charge and invaluable to me.

Briefly, I pay my regular income taxes first on all of the money that I invest into my Roth IRA, up to $5,000 per year. But the interest, dividends, and capital gains that I may receive from my investments are completely tax-free for a lifetime as long as I wait until I'm retired before I start pulling those investment profits out. I can also withdraw my initial investment amount at any time with no penalties and no taxes owed, making a Roth IRA an ideal long-term investment vehicle for saving for a house or for college, or for just having that added security of a giant emergency cash fund.

But what do I invest into? If you've ever taken a look at Kiplinger's Mutual Fund review, there's literally thousands of different mutual fund companies and products on the market. And I'm not limited to investing into mutual funds with a Roth IRA. I could also invest into individual stocks, bonds, CDs, commodities... and the list goes on. I knew a mutual fund was probably the best way to start my Roth IRA, offering me maximum diversification to minimize risk with such a small initial investment amount to work with. I asked my financial advisor for his personal recommendation for a good mutual fund, and he was genuinely surprised that, unlike most customers, I was going to let him actually do the financial advising job that he went to college for. But he was pleased to introduce me to American Funds, one of the oldest mutual fund companies on the market that's been providing quality stock and bond mutual fund products since before the Great Depression.

Now I'm nobody's fool. I do my own research and crunch my own numbers before I sign any papers for anything that's going to cost me any of my own hard-earned money. But just as my company doctor turned me on to a great investment vehicle, so too, did my financial advisor tune me in to a great financial investment company.

American Funds is a family of front-end loaded mutual funds for their A-shares, which means that I pay a 5.75% sales commission on the first $25,000 that I invest with them. That up front sales commission continues to go down in a series of "break points" as I invest more money with this company, with a final 0% sales commission if I can reach the $1,000,000 mark in all of my combined American Fund investments. That 5.75% sales commission sounds like a lot of money, $57.50 for every $1,000 invested. However, if you're looking at an investment term that's longer than 10 years such as saving for your retirement, a front-end load fund with a low annual expense ratio of .51% per year plus $10 per year for the Roth IRA maintenance fee is much less expensive in the long run than a no-load fund with a high annual maintenance fee of $20 and an annual expense ratio of 1.00%. And when I crunched the numbers on a spreadsheet and compared all of the expenses of American Funds with comparable T. Rowe Price and Vanguard funds, two of the most highly recommended and least expensive of all of the different no-load mutual fund families, there was NO signficant difference in the return after ten years, and American Funds was actually the least expensive of the three mutual funds after twenty years, and that's not including any of the sales commission break points. I liked what I saw on my spreadsheets :)

A new account with American Funds can only be opened through a financial advisor, and the advisor I chose was going to be the one who received the 5.75% front-end load sales commissions that I paid. I was happy to give my business to David from the National Planning Corporation, the extremely helpful financial advisor with an office desk at my local bank branch office who had introduced me to American Funds in the first place with his candid recommendation for me. A Roth IRA can be opened with American Funds for as little as $250, but David needed a $1,000 minimum commitment from me for my portfolio maintenance with National Planning Corporation. Simply, that was a lot of legal paperwork that David had to fill out for a $57.50 commission on the $1,000 sale, and I didn't begrudge him his commission. He earned it.

American Funds offers 30 different mutual funds to choose from plus another 9 targeted date retirement funds if you just can't decide which of the 30 different mutual funds you like best. Personally, I like Capital World Growth & Income (CWGIX) best out of all of my different American Fund holdings, and I would highly recommend that one to begin with if I could only chose one. CWGIX is a global fund that invests in large companies all over the world rather than concentrating in any one market location. It pays dividends quarterly and capital gains annually, and has an annual expense ratio of 0.69% compared to the average global fund expense ratio of 1.40%. Over the last 10 years, CWGIX has averaged a 12.20% return, and has averaged 14.34% over the lifetime of the fund.

Now I can't predict what the future is going to hold for financial investments, but I can say that if I average a 12% return in my annual retirement investments, I'll be a millionaire by the time I'm 65. And that thought just has me grinning from ear to ear because I never would have believed it possible on my own modest salary with such a late start.