The traditional IRA allows you to save on income taxes today but pay them when make retirement withdrawals. Your IRA will compound tax free. Recommended for anyone who needs the tax savings in order to afford to make contributions to an IRA.
The Roth IRA allows you to contribute money you have already paid taxes on. Your Roth IRA compounds tax free and you do not have to pay taxes when you make retirement withdrawals. It maximizes tax savings and is highly recommended for young adults.
A 401K is an employer sponsored retirement account. It is completely separate from your IRA and you can have both at the same time. Many employers will match all or part of your contribution each paycheck. Be sure to take advantage of this whenever possible.
You want to reach your goals by taking justifiable risks. An investment pyramid can be used to conceptualizing such a strategy. The base of the pyramid is the safest investment and should be the core of your account. Each level above that becomes riskier but potentially more rewarding.
The S&P 500 Index Fund allows you to invest in the 500 largest US companies. It is considered to be one of the safest ways to invest in the stock market because it is so diversified. You will want to find a fund with low operating costs to maximize your returns.
In order to ensure that you reach your goal of 10% annual appreciation, you will need to invest some of your money in the Technology Sector. This includes large companies like Apple, Amazon, Google and Microsoft that are growing much faster than the rest of the economy.
An innovation fund tries to identify the next Apple or Amazon. It is a risky strategy with the potential for high returns. It will be volatile and its value will see large fluctuations from day to day. It is not for the faint of heart and is optional as it is not needed to reach you long term goals.
Your initial fund allocations should take reasonable risks to maximize your potential long term goals. You have the time needed to overcome any major setbacks in the stock market. Consider allocating 20% to the Index Fund, 70% to the Tech Fund and 10% to the Innovation Fund.
It is important to be disciplined in rebalancing your account annually. In the likely event that your Tech and Innovation Funds have out-performed the Index Fund, you need to lock in some of your profits and move them into the Index Fund. As my grandfather used to say, "You will never go broke locking in profits".
As you get older and have less time to recover from market setbacks, you will need to reduce risks. Simply increase the allocation to the Index Fund by your decade of age. For instance, in your 50's you will want to have 50% of your account in the Index Fund, 45% in the Tech Fund and just 5% in the Innovation Fund (if any).