When I started investing in the stock market back in 1993, my wife and I were dirt poor. I’d just graduated from law school, and our net worth was a negative $55,000. We still wanted to start investing, but we were faced with a big problem–how do you invest when you don’t have much money?

The most we could come up with was $50 a month. I had never invested before, so the idea of going to a stock broker (the Internet wasn’t an option back then) was completely over my head. And then a friend introduced me to the Legg Mason Value Trust mutual fund. With automatic investments from my bank account each month, we were able to start investing with just $50 a month. Unfortunately, a lot has changed since then.

It can be very difficult to find reasonably priced stock investments when you have little money to invest. Even great funds like Vanguard typically require a minimum investment of $3,000. The venerable Vangaurd 500 Index Fund (VFINX), for example, requires a $3,000 initial investment and additional investments must be at least $100 each.

But there are some good options for those with limited funds.

How to Invest with Little Money

So with very little cash, how do you get started investing? There are several options you could take, and I’ll start with my two recommendations.

Recommendation #1: Save up the cash so that you can buy a Vanguard fund. This may not be what you expected, but Vanguard mutual funds are extremely inexpensive to own. The Vanguard 500 Index fund mentioned above has an expense ratio of just 0.17%. That means that for every $1,000 you have invested in the fund, your annual cost will be just $1.70.

If I were advising my children, I’d recommend that they start saving as much as they can in a high interest savings account. Once they saved $3,000, invest in the Vanguard 500 Index fund. It offers excellent diversity at a low cost.

Recommendation #2: For those that don’t want to wait, I’d recommend Betterment. The team behind Betterment has created an online community that makes investing as easy as using online banking. Opening an account is free, and unlike most other investments, there is no minimum balance requirement.

With Betterment, you can invest as little or as much as you want each month. And that’s what makes it great for those without a lot of money. And you can quickly decide how much of your money is invested in stocks and how much in bonds. After that, Betterment does the rest, investing your money in a series of exchange traded funds.

A word about costs. If you start investing say $25 a month with Betterment, you pay an expense ratio of 0.90% (it goes down as you invest more). In other words, for very $1,000 invested, the annual cost is $9. Recall that the Vanguard fund would cost you $1.70 per $1,000 invested. While the difference may not seem like much, over the course of decades of investing, it adds up to a lot of lost money. To see this first hand, check out How Half a Percent Can Ruin Your Retirement. Nevertheless, Betterment is a good way to get instant diversification, is easy to use, and has no minimum investment requirements.

Other Alternatives

There are other options. For example, you could open a discount brokerage account online and invest for as little as $4 a trade. But if you are investing just $25 a month, losing $4 of the investment to fees is just too much. If you take this approach, I’d suggest that you save the $25 and invest it once every four months. This way you pay the trading fee just three times a year, rather than 12 times. And while there are many good discount brokers, I’d recommend OptionsHouse because it offers a flat $3.95 trading fee for ETFs.

Finally, you can always invest small amounts in a 401(k) retirement account. This of course assumes that your employer offers a 401(k) and that you want to lock your money away until retirement. But if that’s not your goal, either saving $3,000 to invest in a Vanguard fund or using a service like Betterment are two great ways to start investing small amounts of money.

Last year one of my largest expenses was one I never saw. I didn’t get a bill for it. And I didn’t have to pay it, at least not directly. But it still cost me a small fortune. I’m talking about investment costs in the form of mutual fund expenses.

Mutual fund expenses present two big problems. First, because you don’t actually get billed for them, it’s easy to forget about them. The cost comes out of your investments, so you never have to write a check for the expense. If you invest in mutual funds through a 401k, IRA or taxable account, you have the same problem.

The second problem, and the one we are going to look at today, is that even small expenses can add up over time. Because we save and invest for retirement over several decades, even half a percent can have a huge impact on our retirement. In fact, an extra 0.50% paid in mutual fund fees can can be the difference between a comfortable retirement and living on a shoestring budget.

Here’s why expenses are so important. The difference between paying say 0.5% and 1% in fees for your mutual funds is ENORMOUS over a 40 year (25 to 65) investment period. Here’s the math, assuming you start with nothing and add $1,000 a month to your retirement savings (take a guess at the difference before you read on):

So given the effect of even 0.50% on retirement savings, there are two things we need to do: (1) determine the cost of our retirement investments; and (2) depending on the results, make changes to reduce our costs.

Determining the cost of your investments

If you have invested in just one mutual fund, determining your investment costs is easy—just look at the fund’s expense ratio. If you don’t know where to look, simply get the ticker symbol of your fund (which should be on your last statement) and enter it into the Google search box. For example, when I enter VEIEX (a Vanguard emerging market index fund that I’ve owned since 2002) into Google, this is the first result:

As you can see, the expense ratio is 0.35%. That means that for every $100 invested in the VEIEX fund, you’ll pay 35 cents in expenses each year.

Now, if you own more than one fund, you’ll want to calculate your weighted average cost. To do that, for each fund you own perform the following calculation:

Amount invested in fund / Total invested in all funds x Fund’s expense ratio

So for example, if I had $10,000 invested in VEIEX and a total portfolio of $100,000, my calculation for VEIEX would look like this:

$10,000 / $100,000 x .35% = .035

Perform the same calculation for each fund you own, and add up the results. What you’ll get is the weighted average cost of your funds.

And if you hate math, then track your portfolio in Morningstar (it’s free), which calculates the weighted average cost of your portfolio for you (here are the details).

You should aim for a weighted average cost of no more than 0.5%, in my opinion. If your costs are significantly higher, keep reading.

How to reduce the cost of retirement investing

There are several ways to reduce the cost of investing for your retirement:

• Invest in index funds: Index funds generally have significantly lower expense ratios than do actively management funds. Because index funds track an index like the S&P 500, you don’t have to pay for the cost of investmen managers to evaluate and pick stocks. And the performance of index funds generally beat managed funds over the long haul anyway.
• Invest in ETFs: Exchange traded funds typically have a lower expense ratio than identical mutual funds. You do have to pay a brokerage fee to buy ETFs, but unless you are an active trader, the fee should be less over the long term than the extra expenses you’d pay for a mutual fund. I recently purchased ITF for my SEP IRA at Scottrade. The brokerage fee was just $7.95.
• Reduce trading costs: If you are a fairly active trader, you must watch the transaction costs of your investment activity. There are plenty of low cost online brokers to choose from. I use Scottrade because it has branches everywhere, but you can find even less expensive brokers like OptionsHouse ($3.95 stock trades) and Zecco ($4.95 stock trades.

NEXT–>How to Find the Hidden Cost of Mutual Funds

As of today, U.S. savings bonds have gone digital. Paper savings bonds are history.

I’m get a bit nostalgic when it comes to paper bonds. There’s just something comforting in holding physical evidence of your investment. And the designs of paper bonds over the years have been quite impressive. So before we get to how and where to buy electronic U.S. Savings Bonds, here are a few bonds for the memory books:

Treasury Direct has put together a great looking timeline of the history of the U.S. Savings Bond worth checking out.

How to Buy Electronic Savings Bonds

The place to buy U.S. Savings Bonds is TreasuryDirect.gov. You can open an account online in minutes (online application page). With a Treasury Direct account, you can invest in the following:

• Treasury Bills: Short term U.S. debt with terms of 4, 13, 26 or 52-weeks. Bills are sold at a discount from the face value. At the end of the term, an investor receives the face value.
• Treasury Notes: Also called T-notes, they are issued in terms of 2, 3, 5, 7, and 10 years. T-notes pay interest every six months until they mature. Notes can be auctioned at, above, or below face value.
• Treasury Bonds: All bonds have 30-year terms, pay interest every six months, and return the face value of the bond at maturity.
• TIPS: Treasury Inflation-Protected Securities adjust with the Consumer Price Index. When the CPI rises with inflation, the principal of a TIPS increases. When the CPI drops, the principal decreases.
• EE Bonds: As Treasury Direct describes, EE bonds are “low-risk government-backed savings products that you can use toward financing education, supplemental retirement income, birthday and graduation gifts, and other special events.”
• I Bonds: Like TIPS, I Bonds protect against inflation by indexing a portion of the interest rate to CPI. There are also some tax advantages to I Bonds over TIPS.

There are several ways to purchase bonds from Treasury Direct. Of course, once you create an account you can begin investing. But Treasury Direct offers several purchasing options you may not know about.

SmartExchange: If you own paper bonds and want to exchange them for an electronic bond, Treasury Direct offers SmartExchange.

Payroll Savings Plan: You can set up direct deposit from your employer. Called the Payroll Savings Plan, you can have a set amount of money directed to your Treasury Direct account for automatic investing.

Gifts: You can buy bonds as gifts through Treasury Direct (details here). Treasury Direct will keep a record of all of your gift purchases, and they offer gift certificates so you have something to actually give as a gift.

Minor Linked Accounts: If you want to buy bonds for your children, grandchildren, or other minors, you can create a minor linked account.

It’s become routine for online discount brokers to woo customers by providing a few free trades or a little up-front cash. But OptionsHouse has taken the idea to another level.  Currently, OptionsHouse is offering five different promotions, each awarding a little something different for potential traders.

I use OptionsHouse for both casual investing and to house my IRA. So far I have no complaints about its quality of tools or customer service.  If you are interested in opening up an OptionsHouse account, consider doing so using one of the five promo codes below.  Unfortunately, each new account can only have one promo code and the refer a friend promo attached, so don’t get any ideas of combining them all!

$600 Cash Bonus IRA Promo

Perhaps the most valuable of all the promotions OptionsHouse is running is the cash back IRA promo.  Depending on how much you are able to open your IRA with (whether new or rollover), OptionsHouse will provide you cash back.  The breakdown of tier levels is as follows:

• At least $25,000 gives a $200 cash bonus : Promo Code ROLL200.
• At least $50,000 gives a $300 cash bonus : Promo Code ROLL300.
• At least $100,000 gives a $400 cash bonus : Promo Code ROLL 400.
• At least $250,000 gives a $600 cash bonus : Promo Code ROLL 600.

In order to qualify for this promotion, you must fund your account within 60 days of opening it and keep the account balance at one of the four above levels for a full 180 days.   Promotion expires December 31st, 2012.

Free Dell Monitor Promo

One of their oldest promotions, OptionsHouse offers a free dell monitor to new investors who deposit a certain amount of money.  The size of monitor a new investor will receive depends on the amount funded.

• $10,000 will acquire a 23″ Dell E Series monitor : Promo Code DELL23.
• $100,000 will acquire a 27″ Dell Ultra Sharp monitor : Promo Code DELL27.
• $250,000 will acquire a 30″ Dell Ultra Sharp : Promo Code DELL30.

New account holders must fund their accounts within 60 days of opening.  They also must make at least 15 trades within the first 90 days and commission free trades do not qualify (that’s a lot of trades for the casual investor).   Account balances must be maintained (through trades or cash) for 180 days and this promotion expires December 31st, 2012.

100 Free Trades Promo

Perfect for frequent traders, OptionsHouse offers up to 100 free trades for all new account holders.  In order to qualify for the 100 free trades, the following criteria must be met:

• The account must be funded with a minimum of $3,000.
• Promo code FREE 100 must be used.
• All free trades must be executed within 60 days of opening the account.
• Promotion expires December 31st 2011.

Free Amazon Kindle Fire Promo

Similar to the Dell monitor promotion, OptionsHouse is also offering a free Kindle Fire when customers open a new trading account.  In order to receive the Kindle Fire, customers must:

• Fund their trading account with a minimum of $10,000.
• Promo code FIRE must be used.
• Make 15 trades within the first 60 days.  Free trades do not qualify.
• Kindle will be received within 30 days of satisfying both requirements.
• Promotion expires December 31st 2012.

Annual Financial Times Subscription Promo

You can never have enough information and OptionsHouse is willing to provide a full year’s subscription to the Financial Times for new investors.  A standard online subscription to the Financial Times will be provided (value of $260) to everyone who abides by the following:

• Open a new OptionsHouse account with a minimum deposit of $5,000.
• Promo code FT must be used.
• Promotion expires December 31st 2011.

Bonus for Referring a Friend ($150 or 30 Trades)

Any active OptionsHouse account holder can qualify to receive either $150 or 30 free trades when referring a relative or friend to open an account of their own.   Qualifying for the cash bonus or free trades is easy and can be done as follows:

• Register for the OptionsHouse refer a friend program.
• Make sure the person you refer opens an account with at least $1,000.
• Refer no more than 50 people per year (max bonus is met).
• If choosing 30 free trades, the free trades must be executed within 6 months of receiving them.
• No expiration date

There are a couple of smaller promotions available with OptionsHouse, such as receiving a $25 cash rebate on wire transfers and free professional coaching for 30 days. But if you’re looking to take advantage of opening up a new OptionsHouse account, the ones above are your best bet.

In a down economy, the possibility of earning big cash bonuses without shelling out money of your own has proven to be difficult.  Outside some of the best credit card deals, banks are becoming more stingy with their promo offers. But OptionsHouse has just launched a goody.  From now until December 31st, 2012, anyone who opens or transfers an IRA to OptionsHouse is eligible to receive up to a $600 cash bonus.

The amount of the cash bonus you’ll receive depends on the size of your initial deposit.  Cash bonus amounts are earned as follows (promo codes are automatically added in your application; but double-check to make sure it’s entered correctly):

• $25,000 IRA – $200 bonus : Promo Code ROLL200
• $50,000 IRA – $300 bonus : Promo Code ROLL300
• $100,000 IRA – $400 bonus : Promo Code ROLL400
• $250,000 IRA – $600 bonus : Promo Code ROLL600

All new accounts have 180 days to reach the required funding level, at which point the bonus will be deposited into your account.  Executing a trade is not necessary to receive the bonus, and OptionsHouse ensures that on day 181, the cash will be in your account.  When I opened up my OptionsHouse IRA, I received 60 days of free trading and have yet to be charged a penny for the trades I’ve made.

OptionsHouse offers a big variety of investment products to help consumers meet their retirement needs. Anyone can trade stocks, bonds, mutual funds, fixed-income products, and perform options strategies like covered calls, spreads and cash-secured puts.  There are no fees to open or maintain an OptionsHouse IRA, and all stock trades are $3.95 a piece, which is one of the lowest you’ll find from an online discount broker.

I’ve owned an OptionsHouse IRA for a few months now. Even though the stock market hasn’t offered big gains, I’m very happy so far.  I chose OptionsHouse because the trading platform was what I needed compared to other brokers. And trades are the cheapest.  When you tack on the possibility of a $600 cash bonus, I’d highly suggest moving your current IRA over to OptionsHouse.

Photo by wonderwebby (Flickr)

A volatile stock market and crummy interest rates have forced a lot of people to get creative when it comes to investing their money. We’ve put together a list of five of the wackiest ways people are parking their cash.

A quick word of caution before you go crazy with these types of investments — experts say that alternative investments as a group should constitute no more than about 5% to 15% of an overall portfolio.

On to the list…

1. Music Royalties 

Do you remember the Theme Song from the Monkees? Hey, hey, we’re the Monkees. That song still produces on average $10,000 a year in royalties and believe it or not, it’s possible to earn a piece of them by purchasing a share of the song at auction. Songwriters often sell a share of their royalties on websites like SongVest.com and TheRoyaltyExchange.com and the auctions are open to anyone.

The Monkees’ Theme song is just one of several currently up for sale, and the shares start at $3,000. You continue receiving royalties on the song until the copyright ends, which is typically 95 years after the artist’s death (the Monkees’s song will produce royalties until 2099!).

2. Ebay Land

Ebay users might remember the “Virgin Mary” grilled cheese sandwich that sold for $24,000. But did you hear about the corner lot in the Mojave Desert that sold for $57?

Surprisingly, Ebay has become home to a number of cheap land auctions like this. Most of the plots are probably cheap for a reason – there’s no demand and their location is unattractive. However, that hasn’t stopped some investors from scooping them up in hopes that they will one day be worth a bucket of cash. Maybe they’re betting that McDonald’s will need a Death Valley location one day.

3. Hurricane Options

Hurricane season is over in a few weeks, but that isn’t stopping one group of investors from watching the tropics very closely. Weather Risk Solutions has created an online trading market that allows traders to bet on where they think a hurricane might land. Traders buy and sell Hurricane Risk Landfall Options (or HuRLOs) that represent different regions of the Atlantic and Gulf coasts. If a hurricane hits land in the region that corresponds to the investor’s option, they split the payout with others who make the same winning bet.

The exchange is still in the beta stages, but the idea is attracting a wide range of investors, including weather enthusiasts, coastline businesses seeking extra insurance, and traders who are familiar with other disaster markets (flood options, etc.).

4. Tax Lien Certificates

A rough economy has left many homeowners unable to pay their property taxes and some investors are taking advantage by purchasing the county’s tax lien. This is possible because local governments, who don’t like to wait for outstanding tax bills, often sell their tax liens at auction where they are scooped up by savvy investors who like their high interest rates and low risk.

In some states, tax lien certificates can be purchased for as little as a $100 and the interest rates can range anywhere from 5% to 50%! Another advantage is that the annual interest penalty is often applied the day after the lien is acquired, so investors will earn an interest payment regardless of when the lien is paid back.

5. Bank Account Bonuses

While Bank of America is busy thinking up new fees to charge its customers, there are a few banks that are still paying large bonuses to new customers that open an account. Bank bonuses are one of the quickest ways to make money and can produce a significant return on your money in a short amount of time.

For example, ING Direct is offering a $50 bonus to anyone who opens an account and maintains a $250 balance for 50 days. That’s a 20% return and it’s your decision whether to cancel the account or continue to use it at the end of 50 days. Check out DoughRoller’s Banking section for a full list of current bank bonuses.

This guest post is from Kyle Taylor, a personal finance blogger who writes about weird ways to make money at The Penny Hoarder.

There are more than 15,000 mutual funds to choose from! Knowing how to wade through this sea of choices can cause the best of us to throw up our hands in despair. The reality is, however, that evaluating a mutual fund is really quite simple. So if you have 60 seconds to spare, here’s how you can quickly evaluate a mutual fund.

1. Look up the fund: Go to Morningstar and enter the fund’s ticker symbol in the quote box at the top left. Press enter. This will take you to the Snapshot of the fund, which contains most of the information we’ll need for our evaluation. (Running total: 10 seconds).
2. Fund availability: The first item of business is to make sure the fund is still open to new investors. Funds close to new investors when the amount of money in the fund becomes too large to manage effectively given the fund’s investment objectives. In the fund’s Snapshot, look for the “Status” label, which will tell you if the fund is open or closed. (Running total: 15 seconds).
3. No-load funds only: Next, make sure the fund doesn’t charge front-end or back-end fees called loads. With so many excellent no-load funds, there is simply no good reason to pay a sales charge. What you need to look at is the “Load” on the Morningstar Snapshot. No load funds will show “none.” (Running total: 25 seconds).
4. Expense ratio: I’ve said it before, and I’ll say it again–expenses are one of the single most important factors in picking a fund. That’s why I avoid funds with sales charges, and why I seek funds with low expense ratios. My rule of thumb is not to pay more than 1% for actively managed funds and no more than 0.50% for index funds. Most U.S. stock index funds are considerably less, some around 0.10%. You’ll find the fund’s expense ratio at the top of the snapshot. For more on fund costs, check out How to Find The Hidden Cost of Mutual Funds (Running total: 32 seconds).
5. The style box: Before picking a fund, you should know what asset class you want to add to your portfolio. Are you looking for a large cap growth fund, for example, or a small cap value fund? You can read more about asset allocation in a series I’ve been writing. Scroll down from the top of the Snapshot and you’ll find the Morningstar Style Box. This will quickly tell you the market capitalization of the fund and whether its investments are value, core or growth. (Running total: 40 seconds).



6. Past performance: Much has been said about not relying too heavily on past performance. The truth is, much of our investing decisions are made on past performance, but with the recognition that we don’t know what the future holds. All of that is why, in my opinion, index funds should represent the core investments for must of us. That said, I always look at the 3, 5 and 10 year performance statistics of a fund as compared to its comparable index. The quick and easy way to get an initial assessment of risk adjusted performance is the Morningstar star rating. However, don’t rely just on the star rating you see on the Snapshot. Instead, click on the “performance” link just below the star rating. This link brings you to a more detailed listing of the fund’s performance, including comparisons to the relevant index, for 3, 5 and 10 years. I look for funds with three stars or better. Again, a more detailed analysis of a fund’s risk adjusted performance can be made, but the star rating is a good, simple place to start. (Running Total: 48 seconds).
7. Fund management: Particularly for actively managed funds, you want to see that the fund’s managers have been at the helm for a number of years. There’s no magic number here, but I like to see that a fund’s top management has been at the fund at least 5 years. Otherwise, the great performance the fund has enjoyed may be due to personnel who have since left the fund. Hitting the back button to return to the Snapshot will show you this information, including the name(s) of the managers and their start dates. (Running Total: 60 seconds).

Is there more to evaluate before actually buying a fund? Sure, but this initial assessment will go a long way to narrowing down the many options. And 9 times out of 10, this quick evaluation identifies the fund(s) I actually end up buying.

Picking your first mutual fund is kind of like a first date–scary at first, but later you wonder what all the fuss was about.

This past weekend, a close relative spent some time with my family and me. We’ll call her Susie (not her real name). Susie is 31, has one daughter (cute as can be), and has no retirement savings (not so cute). Her employer not only offers a 401(k), but also matches 100% of all contributions up to 6% of Susie’s pay. We got to talking about why she’s never starting saving for retirement, and her answer was very illuminating–intimidation.

Sure, there have been times when money was tight, but one of the biggest hurdles was not knowing where to invest her money. We spent about 30 minutes looking over her investment options, and I’m happy to report that she’s enrolled in her company’s Fidelity 401(k) plan and contributing 7% of her gross pay. If you or somebody you know is in a situation similar to Susie, this article is for you.

What’s The Biggest Mistake You Can Make?

As intimidating as picking your first mutual fund may be, the absolute biggest mistake you can make is not picking your first mutual fund. It’s easy to put off retirement savings for another week, or another month, or another year while you think about your investing options. Susie’s 401(k) has about 12 fund options, including stock and bond funds and a few lifestyle or fund-of-fund options (basically, a mutual fund that invests in other mutual funds rather than individual stocks).

Picking ANY of those mutual funds would have been a better choice than not investing at all. The point is, don’t let fear or intimidation keep you from picking that first fund.

What Should You Look For In Your First Mutual Fund?

Assuming you have many, many years to retirement (which I hope since this is your first mutual fund), at least two things will be important to consider:

1. Diversification: A mutual fund that invests in a wide array of companies is a great choice for a first fund. Some mutual funds are limited to a specific industry, sector or geographic region. While these can be great funds as part of a larger asset allocation plan (See my Beginner’s Guide to Asset Allocation series), they would not be my choice for a first mutual fund.
2. Cost: Cost is always important. For an S&P 500 index fund, look for costs to be less than 10 basis points (0.1%). For actively managed funds, I look for costs to be less than 100 basis points.

Two Options

With these considerations in mind, here are two good choices I’d seriously consider today if I were starting out as a new investor:

1. S&P 500 Index Fund

This was Susie’s choice. Her plan offered a Fidelity S&P 500 Index Fund that costs just 5 basis points per year (0.05%). 100 basis points is equal to 1%. In other words, for every $100 Susie invests in this fund, the fund will charge her account just 5 cents per year.

And the fund provides instant diversification, as it invests in the largest 500 U.S. public companies. One thing to note is that the amount invested in each of the 500 companies is based on the market capitalization of the company, which I’ve written about before. What that means is that more will be invested in the larger companies (e.g., Microsoft or GE) in the fund than will be invested in the smaller companies.

2. Single Fund Solutions

An Index fund is not the only option, however. Another choice Susie had was to invest in a fund that owns other mutual funds. Fidelity calls them Freedom Funds while Vanguard has a similar set of funds it calls Target Retirement Funds. These funds provide a mix of domestic and foreign stock funds and bond funds all rolled into one. The mix is based on how many years you have left until retirement. The upside is simplicity. One fund and you’re done. The downside is lack of control. You’re basically limited to a few options. Again, not a bad choice, just not what Susie wanted.

Other Options

There are other options, of course. Susie could have chosen the Fidelity Magellan fund (FMAGX). The fund is closed to new investors, although the option was available to her through her company’s 401(k). Magellan is an actively managed large cap fund that may have seen its best days years ago under the management of Peter Lynch. My first mutual fund was Legg Mason Value Trust (LMVTX), another actively managed stock fund run by Bill Miller. Picking an actively managed fund, I believe, requires a lot more research than choosing an index fund or single fund solution. So I think Susie made a great choice.

If you are a beginner, I highly recommend the book, The Bogleheads’ Guide to Investing. I’ve bought Susie a copy, which she has promised to read. Along with the Fidelity S&P 500 index fund, she is off to a great start. If you’re just beginning or know somebody who is, let us know how you picked your first fund.

As part of rolling over my 401(k), I’ve been spending some time with my retirement investments. I’ve tweaked my asset allocation and rebalanced my investments. And as part of this overhaul, the question of just how much money we need to retire has been on my mind.

So I did some research into the question. I found a few rules of thumb used by the “experts” when advising clients. While the exact amount needed for retirement varies a bit from one expert to another, the general rule is the following:

(Yearly Income Needed – Social Security and Pension Payments) x 25

Let’s look at an example. Suppose you need $100,000 a year during the first year of your retirement. Let’s also assume that you’ll receive $25,000 in social security or pension payments. Reducing your income needs by the social security and pension payments leaves you with $75,000 that will need to come from retirement savings. Multiplying the $75,000 times 25 gives you how much you need to retire–$1,875,000 in today’s dollars.

Why the rule of 25?

So what’s the logic behind multiplying your retirement income needs by 25? The theory assumes that you’ll earn about an 8 percent average return on your investments during retirement. In order for your retirement assets to keep pace with inflation, you’ll keep 4 percent of your returns in your investment portfolio, and withdraw the other 4 percent to live on.

It’s this 4 percent withdrawal rate that gets us to the rule of 25. Four percent of $1,875,000 is $75,000, exactly what we needed from our retirement investments in the above example.

There are no guarantees

As you can see, there are a number of uncertainties when estimating retirement needs. While we can do our best to project what we’ll need to live on during retirement, expenses could always turn out to be higher or lower. And we can’t assume our investments will actually return eight percent. Maybe they will return less. And a four percent inflation rate, while reasonable based on historical standards, may prove to be grossly understated.

Because of these many uncertainties, financial experts offer a range of ways to calculate how much one needs to retire.

A survey of the experts

Some experts believe that a safe withdrawal rate is just 3%. As a result, they advise saving 33 times your annual income needs in retirement. This is the rule of thumb suggested by Dallas Salisbury, president of the Employee Benefit Research Institute (EBRI).

Sydney Lagier, writing for MSN, believes that 33 times income is needed if you are younger than 50. For those in their 60′s or 70′s, however, he believes a percent withdrawal rate is reasonable, requiring just 25 times needed income.

The Wharton School of Business believes you should assume that you’ll need 100% of your pre-retirement income, not 70 to 75 percent recommended by many financial advisers.

Vanguard advises withdrawing no more than 3 to 5 percent per year during your earlier years in retirement. While this may seem like a narrow range, the amount of money you need saved for a 3 percent withdraw rate (33 times your yearly income needs) is dramatically different than if you used a 5 percent withdraw rate (20 times). The more you take out each year, the more likely you are to run out of money in retirement.

Fidelity sticks with 25 times your yearly income needs, but with lots and lots of caveats.

Over at Morningstar in an interview of a Boglehead (a group named after Jack Bogle, the founder of Vanguard), a 4% withdraw rate is viewed as the most you can safely take out of your retirement savings (which yields a 25 times rule).

Finally, I’ll leave you with a great infographic from my friends at GoBankingRates (hat tip to MoneyNing):

It’s been a while since I’ve seen Sam Waterston (who you might know as district attorney Jack McCoy on Law and Order) promote TD Ameritrade in television commercials. But after years of wondering whether or not they are a top notch online discount broker, I decided to give them a shot.  Oddly enough, I learned in writing this review that the “TD” in TD Ameritrade stands for “Toronto Dominion” so we actually have a Canadian Bank with an American twist.

Opening a TD Ameritrade Account

I wish I could tell you something invigorating happened while I was opening up my new TD Ameritrade account, but I cannot. The process took a total of 15 minutes and required all of the usual information like name, contact information, employment information and your banking information (should you choose to make your initial deposit via e-Check).

The only different part about opening an account with TD Ameritrade was what to do with cash not invested.  I had the choice of opening a TD Ameritrade deposit account where my cash would earn interest or simply keeping my cash in the brokerage account where it would not earn interest.  I chose the latter because I don’t expect to keep cash lying around my brokerage account.  I’ll deposit cash to invest it or immediately withdraw money when I sell.

Trading Tools and Technology

Experienced investors may be familiar with one of the platforms used by TD Ameritrade. As I login to my account, I see that I can download thinkorswim from TD Ameritrade. Thinkorswim was actually its own trading platform before TD Ameritrade acquired it, and it’s now been fully integrated with all TD Ameritrade members.

thinkorswim

Thinkorswim users can access professional-level tools for serious traders, which I would one day like to be.  You’ll get streaming real-time data, customizable charts, integrated one-click trading and all of the features below.

• Trade analysis with volatility and probability tools
• Advanced charts with studies
• Real-time performance and risk monitoring
• Backtesting
• Anytime paper trading in past markets through thinkOnDemand
• Active trader interface with time and sales
• Live-streaming CNBC Plus

Trade Architect

For those feeling frisky enough to use the somewhat newly integrated platform provided by TD Ameritrade, a second option presents itself in the form of Trade Architect.  The beauty of this platform lies with its features and its costs.  Unlike other brokerage houses, the following services come 100% free to all traders:

1. Streaming News
2. NASDAQ level II quotes
3. Trading specialists

Free Trades & $500 Bonus

For a limited time only, investors who open up a new (meaning no previous ties to TD Ameritrade) trading account are eligible to receive 60 days of commission free trading with up-to a $500 cash bonus.  Commission free trades are limited to 500 for every new account holder, provided after a $2,000 initial deposit and the account must remain open for a minimum of nine months, or the free trades made will be voided.  The cash bonus every new TD Ameritrade member receives depends on how much the initial deposit is.  The breakdown is as follows:

• $500 Cash Bonus – Over $250,000 initial fund
• $250 Cash Bonus – $100,000 – $249,999 initial fund
• $100 Cash Bonus – $25,000 – $99,999 initial fund

TD Ameritrade Mobile Apps

iPhone App (Above Left) & Android App (Above Right) – I can’t even imagine trading thousands of shares using an iPhone, but if you like the comfort of your handheld device, TD Ameritrade can make it happen.  Using the iPhone or Android will allow you to:

• Set text and alert emails so you never miss your price
• Access real-time quotes for any stock or fund
• Trade with a virtual currency (Paper Trade) if you need the practice before diving in to a real cash account
• Execute trades on  stocks, exchange-traded funds (ETFs) and enter multi-leg options orders

Commission Structure

If there’s one reason why a guy like me wouldn’t use TD Ameritrade as frequently as possible, it’s the commission structure.  I would classify myself as an infrequent, inexperienced trader who doesn’t want to pay a little extra for a little more in terms of trading freedoms and technology.   I like spending under $5 for any stock trade I make (TradeKing, Zecco, OptionsHouse).

But depending on the type of trader you are, you may find value in the prices offered by TD Ameritrade.  I’ve listed a current table of all commission costs.

Trade Type	Internet Cost	Interactive Voice Response Cost	Broker Assisted Cost
Stocks	$9.99	$34.99	$44.99
ETF's	$9.99	$34.99	$44.99
No Load Mutual Funds	$49.99	$49.99	$49.99
Options	$9.99 + $0.75 per contract	$34.99 + $0.75 per contract	$44.99 + $0.75 per contract

The Bottom Line

So after everything you see above, the $64,000 question is whether or not TD Ameritrade is the right broker for you.  I can’t really answer that question, but I can tell you these guys have everything any trader will ever need to be successful.   Your money is 100% secure, you have amazing tools to analyze trends and potential outcomes and mobile options if you’re on the road.  Truth be told though, I could probably say that for almost any online discount broker I’ve reviewed in the last five years, so ultimately it comes down to loyalties, preferences and effective marketing.

I’ll be keeping my TD Ameritrade trading account active for a while making an occasional trade, but the majority of my investing will be made elsewhere, as I prefer a $3.95 per trade cost rather than a $9.95 per trade cost.  I’ll give these guys every opportunity to blow me away with excellent customer service and better trading tools.

• Consider opening a new TD Ameritrade account and receive 60 days of free trading with a cash bonus of up to $500.