$5,000 poorer, but not really

I cringed as I transferred $5,000 out of our checking account yesterday. That money looked so pretty, sitting there all happy, waiting for its turn to venture to the land of ING, where it would live comfortably amongst our various savings account. But this chunk of change had a different future. A less glamorous, albeit still important, destiny.

As much as it hurts taking money out of savings/checking to put it in to a retirement account –specifically our Roth IRA– it’s the right thing to do. Or at least that’s what the PF gurus say.

Dave, Suze, Jim

I learned about Roth’s shortly after I graduated college in 2007. Upon learning of their many benefits, and few drawbacks, I promised myself I would fully fund my Roth every year. No excuses. Five years later, I’ve stayed true to my word.

Contributing to my Roth used to be more exciting. Probably because when your account balance is $5,000, and you add $5,000 more following year, you get to watch your investments literally double overnight. But now that my contributions are a fraction of the overall account balance, I just get bitter that I have to take money out of checking.

Stupid brain making me think stupid things. 

I know the benefits of contributing to a Roth are huge for someone my age. Investing from age 25 to 35, and then never again, will leave me wealthier than a 35-year-old who contributes $5,000 every year until age 60. The 35-year-old would put in over double my contributions and STILL come out hundreds of thousands of dollars behind me come retirement.

If you are a 20-something reader of PDITF and you HAVEN’T contributed to a Roth IRA before, it’s time you put down your iPhone 5 and Starbucks, and get yo shizz together. Your future self-will thank you for it.

39 thoughts on “$5,000 poorer, but not really

  1. How do you feel about maxing out your 401k and then maxing out your Roth IRA?

    I am no longer eligible for the Roth IRA, but do have access to a Roth 401k through work.

  2. You could be like some people who can’t contribute to an IRA because of income restrictions. It sucks! I wish I could put 5k away for my retirement in an IRA.

    • I posted that and then felt it sounded a little snarky…I am not trying to be snarky…I was just thinking I wish I had that problem and feeling sorry for myself. 401k’s can contribute more in 2013, but again, I cannot max it out either. Pisses me off that they place restrictions on saving for the future!

  3. Brandy, you can contribute to an IRA regardless of income. You don’t see tax benefits after a certain income level.

  4. Just curious – Why do you fully fund your IRA in one go instead of dollar-cost-averaging your way in? And why did you fund it in October instead of January?

    We DCA into our Roths but that’s because we don’t have the cash sitting around!

    • He is at Vanguard I believe. They have a money market fund and he could be buying 5000 of that and over time exchange those funds for funds of his choice. That way he is still dollar cost averaging. That’s what I would do if I were to do a lump sum.

    • A lot of folks advocate putting in as much as you can as early as you can to take advantage of time and compounding. If you invest in stock/funds with high yields that pay out more often than annually, you get greater benefit by getting the money invested earlier. And, if you automatically reinvest, that’s where the real compounding/time issue come in to play as you get more distributions which turn into more shares which in turn lead to even more distributions and shares as time goes forward.

  5. Emily, I automatically set aside 95$ a week and make the investments as I see fit. That strategy seems to work best and allows you to invest in other funds periodically.

  6. You got to max your Roth IRA, and as a federal employee you should also have access to Roth TSP as of May/June/July or some such, which has the 401k contribution limit, but Roth-style. Haven’t seen a mention of that yet =)

    • The federal Thrift Savings Plan (TSP) Roth has more restrictions on it than an independent Roth. If you elect to contribute to it, your annual contributions are distributed between it and the TSP. This applies when you start withdrawals as well: your funds will be pulled proportionally from both accounts.

      I’ve chosen not to use it due to the linkage between accounts. It doesn’t allow the flexibility I want that would allow me to choose how much from taxable and non-taxable accounts when I retire.

  7. I think you should put in more information regarding Roth IRA’s, specifically what stocks, funds, bonds people should invest in. Simply putting money into a Roth does not guarantee success. I don’t think everyone knows how to invest properly in their IRA’s.

    • I can’t tell people what they should do A) because I don’t know them, and B) I’m not allowed to. I’m not a CFP or CFA and don’t have the necessary licenses to provide any direct financial advice. I’d open myself up to a lawsuit if I did that.

      That said, I invest in VTSMX, VGTSX, and NAESX. All Vanguard funds with low expenses. I get a little Big Business, a little small business, and a little international. Helps keep me diversified without being too convoluted.

  8. Midwest, how do you know “he” wont do that? I dont think StackingCash is looking for someone to do the legwork, just tell his readers what he likes.

    • I inferred the obvious from his statement:

      “I think you should put in more information regarding Roth IRA’s, specifically what stocks, funds, bonds people should invest in”

  9. I haven’t not been able to contribute the maximum to my Roth IRA every year. Last year I contributed $800, and this year I have contributed $866 so far. I hope to continue to add more money to the Roth these next 10 years in hopes of taking advantage of the compound interest.

  10. My $.02 on various comments above:

    Ninja: “I just get bitter that I have to take money out of checking.”
    But why? You are putting your money into a vehicle that could grow tax-free until retirement, and which potentially could be more lucrative than keeping your funds in cash.

    Ninja: “I know the benefits of contributing to a Roth are huge for someone my age. Investing from age 25 to 35, and then never again, will leave me wealthier than a 35-year-old who contributes $5,000 every year until age 60.”
    Even so, I see no reason not to keep contributing to your Roth until age 60 or beyond.

    Dreemsie: “How do you feel about maxing out your 401k and then maxing out your Roth IRA?”
    My suggestion would be to contribute to the 401(k) until you reach the maximum employer match. Even though you have limited control over the investments available, that’s free, tax-deferred money. Then go with the Roth.

    College Investor: “Huge fan of the Roth, but you could have probably picked a better day than right before the market tanked 100+ points.”
    Doesn’t matter. It’s a minor fluctuation. Watch the market over periods of years, even decades, not days, and it has always historically gone up over the long run.

    Cash: “I think you should put in more information regarding Roth IRA’s, specifically what stocks, funds, bonds people should invest in. Simply putting money into a Roth does not guarantee success. I don’t think everyone knows how to invest properly in their IRA’s.”
    Agreed. But a Roth IRA, unlike a 401(k), allows you total personal control over where you invest. I personally like the idea of going with low-fee index funds like many of Vanguard’s, or the Fidelity Spartan funds. Either the Vanguard Balanced Index Fund Investor Shares (VBINX) or LifeStrategy Moderate Growth Fund (VSMGX) could be a good well-diversified choice, with the edge to VSMGX because it also includes an international component.

  11. Exactly, Larry :). By just saying stick it in a Roth and you will be rich is not enough. It takes a little bit more research.

    • With the same disclaimers Brandon has expressed above. I am not a CPA or CFP either. I’m just relating what has made sense for me.

  12. My father taught me a lot of things about work and finance. But the one thing that I will not forget among them is his constant reminder of saving up for my retirement. No regrets, I have been maximizing my 401 for the past 15 years aside from my personal retirement savings account and other investments so I am confident that I will not be really poor when I retire.

  13. If I get a bonus this year, at least $1,000 will be going to the Roth. We’re pretty far behind, but very little of that was voluntary. I have a disability, so barely worked in my 20s. I’m only working now because I found the unicorn of a job that pays well and lets me work from home. And now my husband is on disability.

    In other words, we’ll be lucky to ever max out even one IRA, forget two. Looking back, I should have put more in while we were paying off debt, but I have a rigid, consuming fear of debt (no pun intended?) and so I was too focused on that and not putting almost anything away. And we still haven’t upped it since our finances improved a bit. Mainly because we keep getting knocked down.

    Still, that’ll keep happening, so we need to just have the money taken out no matter what.

  14. Hey Ninja – was hoping to get some advice and insight. I’ve been reading for awhile, first time writing though.

    At what age were you able to start contributing the max to your ROTH?

    I love personal finance blogs, but they do bog me down sometimes when I hear of how much people some people are able to put away! I know everyone has their person opinions of debt payoff vs investing, but here is what I’ve been doing since I turned 23 and have been in my real world job (did grad school right after undergrad).

    I pay about 3 times my minimum student loan payment, in hopes to pay a 10 yr loan off in 4 years. And also have a car payment that I am trying to meet in 3.5 years (in future hope to only buy car with cash). I contribute 9% to my employer 401k (they match up to 7%) – 2% of that goes into a ROTH 401K through work.

    I had been doing $200/mo to my personal ROTH until I cranked up my student loan payments. So I’ve been down to only $100/mo for quite some time now. This leads me to my current predicament. I’ll be getting married in May, and my fiance is in grad school. My money has been so tight month to month, that I’m thinking of dropping my ROTH contribution for the next 8 months. I turn 26 in June, and hopefully around that time we will soon have 2 incomes. At that point I would really like at least one of us to contribute the max (do you and GN contribute max, or just you?).

    Anyways, I know you can’t give any official advice, but any opinions you have on my situation would be great. Mostly your thoughts on the loan payments (I believe you are an advocate of debt payoff first). And second, if you think I will still be alright ramping up my ROTH when I turn 26. I just want to be putting everything in the right place! Not to mention I don’t have a great amount of cash liquidity either since I’ve been trying to spread it everywhere! (Emergency fund is covered and attempting to start saving for a down payment on house, but I’ll leave those questions for another day).

    Thanks and I love your articles and humor!!

    • Samantha – mind if I chime in?
      The plan to pay down debt is far more emotional than I had thought. Logic and my spreadsheet tell me to pay highest interest debt first and work down from there. Others swear by the snowball method of paying smallest debt first to fell like you are making progress.
      My thoughts are first, always deposit enough to get the match. If one has any high interest debt, that should come next as paying off a 12-20% credit card is a better return that the market is ever likely to offer long term.

      In your situation, I am scared by the lack of liquidity. You don’t share what the rate is on your student loan, but I’d take a step back, and just make the regular payments. You want to buy a car, save for a house, etc. Know what? The $10K you threw at the loan may be the difference in your ability to buy the house and do it right, with 20% or more as down payment.
      Keep in mind, once you send money to the loans, you can’t get it back. But money deposited to a Roth can be accessed with no issue. It’s already been taxed, and the deposit, but not growth, can be withdrawn with no penalty.
      Let’s be clear, this is my opinion, my approach. I suspect everyone has their own comfort level and their own way to order their debt payment and savings.

      • Thank you so much for the insight. I totally agree with you, leaving money aside gives me all of the options in the future. And I believe I am disciplined enough to not spend this extra money when it is not going to my loans. I have a lot of variables come 8 months from now, so the extra money aside will definitely help – and then at that point I can decide where to put the cash!

        Already made the call to lower my payments – thanks again! I think I knew it was the right thing to do I was just battling myself over it.

        • One other point – I’ve seen people who had a $500K mortgage aim to knock it off in 10 years. 7 years into this plan, the larger earner lost her job. Their savings was minimal, but the mortgage payment was still due next month and they were far worse off than had they socked away a robust emergency and savings account. It’s great to have no mortgage, and there’s a time to accelerate those payments, but until the mortgage is paid in full, you still have the monthly check to write.
          Once you’re married, you should consider sitting down and discussing how the two of you view money, debt, budgeting, etc. Keep reading, here and other PF bloggers, a bit of time and you’ll have an overview of financial topics that would rival most undergrad degrees in the topic. Good to talk to you here.

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