So the one thing I did do in my 20s was start an automatic investment program. And that is my big money advice to y’all. A Roth IRA is just a good idea for any young-ish person who is eligible. (those earning up to $114,000 $166,000 in 2007).
This is probably very basic advice, I know, but hey when I worked at the Daily News there were people there who weren’t contributing to their 401(k), even though we had a company match. Essentially they were turning down free money. So I figure there must be a market for simple advice.
Some reasons to contribute to a Roth IRA (“Individual Retirement Account”):
- Unlike a regular IRA you won’t save money in taxes now, but accumulated interest is tax-free. If you have a long way until retirement, this adds up and is probably a better deal than a regular IRA.
- You can take out the money you’ve contributed (but not the interest) at any time. I consider my Roth my emergency savings account. (Of course what if I did tap it I wouldn’t be able to put the money back into the Roth, but I’m not planning on having any emergencies, knock on wood)
- You can also take out the principal and up to $10,000 in interest to buy a home. So my Roth doubles as a potential home-buying account.
The nice thing about an automatic investment program is that I’ve just had the money deducted from my checking account for years now. You just set it up and forget about it. Yes New York City is an expensive place to live but I have done such things as live in Astoria, Union City, N.J. and with a roommate to save money here.
My Roth is with Janus Capital Group, a Denver-based mutual fund manager that lets you open a Roth IRA with a automatic investment program for as little as $500. Fidelity, the largest mutual fund company, waives its $2,500 minimum fund investment if you make an automatic monthly contribution of $200 or more. T. Rowe Price has a $1,000 minimum for starting an IRA but you can set up automatic monthly contributions for as little as $50. And Vanguard is well regarded but has a $3,000 account minimum for IRAs. There are a ton of other companies out there as well.
So anyway, that is my advice. Socking away $250 a month now can easily snowball into $1 million in 40 years, so get socking…
I strongly agree! (Except that for singles, the phase out ends at 114,000 for singles. It’s 166,000 for a married, joint return.)
If you work for a company that matches 401(k) contributions I would do that, as it’s free money. But a Roth is great – particularly if you’re hoping to make more income when you’re older.
BTW, a great book to read is The Wealthy Barber, by David Chilton. It’s a little old, but it’s really simple, and an easy read for people who don’t know much about investing and preparing for the future.
If you withdraw from a Roth IRA before age 59 and half, you will pay penalties–something like 10% plus ordinary income tax. Also, the account has to be open for at least 5 years before you can withdraw without penalty.
You definitely should not think of a Roth as an emergency fund.
https://www.oppenheimerfunds.com/investors/ret_plans/rothIRA.jhtml
Actually Jennifer from what I’ve read you can withdraw the amount you’ve contributed at any time and for any reason. It is only the interest where you get into the five-year clock and the penalties. (I had a Roth for several years before I realized this)
E.g., if I have contributed $20,000 to a Roth IRA, which is now worth $30,000 in appreciation, I can take out the $20,000 whenever I want, penalty-free. After all I have already paid income tax on that money.
It’s only if I want to withdraw more than the $20,000 when you get into the penalties you mention.
The danger in taking money out is that I couldn’t put it back in later, since the $4,000 annual contribution limit applies. But I’m hoping an emergency won’t befall me, knock on wood.
Danny, you are right though.
You’re assuming that Congress won’t change the laws to tax Roth withdrawls at some point in the future. Hopefully they won’t, but since we’ve dismantled pensions in this country, IRAs hold huge amounts of money, and we’ll be facing huge entitlement payouts in 20 years…
You could say that about any savings plan, though… you’re making assumptions that Congress won’t change the rules.
Plus, it’s a damn good emergency fund, since if your company is matching it, it’s doubling your money!! If it’s only the interest you can’t take out, that means you can take out your company’s moola AND yours.
Is the Roth IRA the same as a SIMPLE IRA?
Never mind, I found out about SIMPLE – it’s sort of like a Roth for smaller businesses, with a few differences.
Anyway, I didn’t realize that both IRAs could be used to buy a house – thanks!!
What ‘interest’ are you talking about in a Roth IRA? I put money into the account, I buy stocks, and watch them appreciate. There isn’t any interest accrued, although I’m up 61 percent over the life of the Mofo Fund’s inception date five years ago.
Reader – you’re not going to have an employer match on a Roth IRA, because it’s not a employer-sponsored plan. You just set it up individually with a broker or mutual fund company.
Mofo – Interest, appreciation, dividends — whatever you want to call it. If you bought $1,000 worth of stock and it is now worth $1,610 you can sell it and cash out the original $1,000 penalty-free. At least that is my understanding.
>>Interest, appreciation, dividends — whatever you want to call it
All three are markedly different things. It pays to be precise when it comes to this stuff.
OH…well, my employer IS contributing to my SIMPLE. Wahoo! But I can’t afford to put away $250 a month. Drat.
Mofo you are right. I should have said, “earnings.”
That is bullshit that you can’t afford to put $250 away. Well of course I don’t know your situation, but I bet you can put away more than you think. I was putting away $2,000 a year into an IRA soon after I graduated for college. And I was making $26,000 and living in New York City. Adjusted for inflation that is equal to $250 per month.
Derek is right, once you set up the automatic deposit, you just adjust your expenses. One of the best times to do this is right after you get a raise. You can just adjust your salary back down to where it was before and never feel a thing. Heck you survived before so you can’t say you can’t continue to make due. Then you can start socking away some bucks. This is especially valuable if you aren’t taking advantage of an employee match.
On the other end of the spectrum, did anyone else see the NY Times article about how a good portion of people may be saving too much for their retirement? Some financial advisors are suggesting that as a retiree one will “need” as much as 100% of their standard salary. That is, of course, bullshit as well. How they think that an 80 year old retiree, who most likely owns their own home free and clear (remember those 30 year mortgages do eventually get paid off if you want them to), has no kids to take care of and in fact probably gets a little support from them, is going to have the same level of expenses as when they were 50 and paying for school for kids and mortgage for the house is beyond me. Total bullshit.80 year olds don’t spend very much money because they don’t do very much and they don’t have to support anyone else anymore. Now this doesn’t mean that you shouldn’t sock away a few thousand a year. I’m sure that most retirees get by just fine on less than 50% of their pre-retirement salary. Especially when they get really old.
That was a very interesting article that may be a basis for a future blog post. A couple points: I remember a discussion I had with Megan McArdle where she was talking about this guy’s theory that if we make it through the next couple decades we might have good odds to live to 160. With all that’s going on with nanotechnology and medicine I think that’s actually pretty reasonable. But to live to that age health care costs might be astronomical and it’s easy to imagine a tiered system where only people with lots of moola get the benefits of nanotechnology.
On the other hand, who wants to retire, anyway? What do people do in their retirement? I sorta think I’d get bored just putzing around the house and cruising the Internet. And you can only do so much traveling… I sorta think I’d like to work part-time once I “retire.”
Lastly like my other post says it really doesn’t make economic sense to own your home free and clear. Sell it, rent and put your money in the stock market. Or trade up to a bigger house.