RSS Feeds
Facebook
GRS Twitter
In response to the earlier post on compounding, Dave pointed to the latest from Ben Stein, “Six key principles of saving for retirement”. According to Stein’s column, your retirement income is affected by:
- How much you save. The more you’re able to set aside, the larger the pool of money on which the other forces can act. There’s a significant difference between investing $20 a month and investing $200 a month.
- How long your savings compound. When you’re young, time is your ally. Make the most of it.
- How you allocate your money. Like many smart people, Stein is a fan of index funds.
- How much your investments return. This is beyond your control, of course. Stein says that you can help maintain consistent returns if you’re able to afford real estate investments. This sounds like an Advanced Topic.
- How low you keep fees and costs. The less you pay other people to manage your money, the more money you have to invest.
- How well you minimize taxes. Take advantage of 401(k)s and IRAs!
Stein believes that the three most important factors in retirement savings are: starting early, saving as much as possible, and diversification. To illustrate the power of compounding, he writes:
“A thousand dollars socked away when you’re 20 and growing at 10 percent per year will be almost $73,000 when you’re 65. The same sum saved when you’re 50 will grow to $4,200 at age 65. That’s a stunning truth that should compel any young person to start saving early — and the rest of us to start right now.”
I think the most important factor in retirement savings is psychological. From experience, it’s a difficult subject for a 21-year-old to grasp. When I was 21 and newly out of college, I couldn’t be bothered to save for retirement. Retirement was more than two lifetimes away — I thought I had forever to worry about it. A couple of friends had already begun to save; I thought they were crazy. I spent my money instead.
Now I’m 38 and only just beginning to save for retirement. I’m behind the curve. I’m fortunate that my company has been diligently putting money away for me over the past decade — otherwise I would have zero savings!
If a young adult is able to master her urge to spend and is able to take the long view, she will quickly find herself ahead of her peers.
[Ben Stein: Six key principles of saving for retirement]
This article is about Retirement Tuesday, 3rd April 2007 (by J.D. Roth)
April 3rd, 2007 at 12:54 pm
I saw an interesting thing recently. If you can sock away $125,000 by age 40, it alone will compound to 1 million by age 61. (11% annual stock market return doubles your money every 7 years)
Granted there are a lot of ifs in that, primarily the rate of return as you probably don’t want to have all your money in a total market index fund at age 58! However, I think the important point is that if you didn’t start at age 21, don’t give up on the idea. $125K by the mid 40’s still turns out to be a decent nest egg. Combined with SS, which will probably continue to exist in some form, and part time work, you won’t starve in your golden years.
April 3rd, 2007 at 1:15 pm
Keep in mind that the cost of living will nearly double between age 40 and 61, making the purchasing power of that cool million more like a half-mil. Sorry, don’t shoot the messenger.
April 3rd, 2007 at 1:45 pm
While it’s certainly great advice to take advantage of the time value of money, I wish people wouldn’t give examples with 10% annual returns. I know 10% is easy to compute with and I know it’s widely used in finance/accounting education, but I’ve yet to find an investment in the real world where you can count on 10% EVERY year. If you’re going to write an educational article, I think it’s doing somewhat of a disservice if you give people inflated expectations. 5% would be much better since it’s something you can actually count on nowadays with online savings accounts…
April 3rd, 2007 at 2:08 pm
I think the most important factor re: retirement savings is simply knowing where the hell to stick the money … when I was in my early 20’s, I definitely could understand the importance of saving for retirement, but then I discovered the ugly news that I would have to figure out where to put the money, which is a difficult pill for a young person to swallow. The fact is, one has to read many, many financial books and articles and things of this nature to finally realize the consensus that there’s no investment that can begin to be as significant or as important or as dependable as an index fund. Okay, so you learn that an index fund exceeds any other kind of retirement investment, well, then the question becomes, which index fund? If we keep reading, the consensus is to pick something broad, like for instance The Vanguard Total Stock Market Index Fund. But it’s impossible to come to these sorts of conclusions and feel secure in our choices until we’ve hit the books HARD, checked “scripture” w/ “scripture” if you will. All this is simply more work than most kids are willing to do.
April 3rd, 2007 at 2:26 pm
Chance — what a person can do is AVERAGE 10% per year over long periods of time, 10, 15, 20 years kinda thing. For example, you could start investing in The Vanguard Total Stock Market Index Fund, and you could easily average 10% per year if you were just willing to sit back and WAIT for many years. But this is the nature of retirement investing, i.e., YOU PATIENTLY WAIT.
April 3rd, 2007 at 2:56 pm
I’ve been reading for while but still am not sure how the tax-deferred advice makes sense. It seems many personal finance blogs always say “put as much money as you can into tax deferred savings.” I’m 25, so maybe someone with more investing experience can explain this to me.
I figure, right now, I make the least amount of money I will ever make during my working years. Also, for the next probably 3 years or so, my yearly income right now is probably less than what I will withdraw per year while being retired. Why would I invest in a my company’s 401(k)? Right now I am investing it in a Roth 401(k). Am I an idiot?
Also, I have a job which does not allow me to invest in indices. I suppose the takeaway for people with investment independence issues should just try to diversity as much as possible.
April 3rd, 2007 at 3:01 pm
I’m with Dave– all I know about retirement savings is that I need them, but I’m twenty-two. I make more money than I spend, but it’s not like I have enough to reliably sock away a thousand a month. I’m still working on an emergency cushion.
I know I should set up an online savings account, or at least *something* with interest. I know I should find an index fund. But no matter what I do, I’m going to feel like I’m screwing up horribly. Add to that that I don’t know how to do investing things (step one: call parents. Step two: don’t feel bad when they laugh at me for wanting to know stock market things when I don’t have the money yet. Step three: don’t panic while finding a money person).
April 3rd, 2007 at 3:04 pm
re: Dave - I know exactly what you mean. Here, at the age of 24, I’m totally lost as to where to invest money. Index funds, you say? Sounds good. Let’s do it. Next step: HOW on earth do you go about investing in an index fund? Do you take it to the bank? Is there some company you have to go through?
J.D., is this a topic the Canadian guy will be covering in his videos?
April 3rd, 2007 at 3:04 pm
So, say I have $1000 I want to put away in my youth… Where’s the best place to put it? Dave’s comment is much more helpful to me than anything in this post, which feels a little too much like
1. You should save for retirement while you’re young.
2. ?????
3. PROFIT!
April 3rd, 2007 at 3:06 pm
Ha, Diatryma, looks like we’re in the same boat…
April 3rd, 2007 at 3:25 pm
Here’s what you could do — you could set up a checking account or a savings account at a regular old bank, then you could pick up the phone and call Vanguard at 1-877-662-7447, then you could tell them you want to open a ROTH IRA, and you want to invest that ROTH IRA in the Vanguard Total Stock Market Index Fund, and you want to contribute X-amount of dollars to it every month by having Vanguard AUTOMATICALLY debit the checking or savings account you’ve set up. It’s as easy as that. You do not need a broker or whatever; you can do this all by yourself.
April 3rd, 2007 at 3:31 pm
@Kevin: The reason to be in the 401K is the matching from your employer. If your employer matches up to 5% - you should at a minimum put 5% of your pay in each month. The employer match is free money. Hell, you could let it all sit in cash without investing it and you still make 100% each year from the employer contributions. (Or whatever the employer match is)
April 3rd, 2007 at 3:33 pm
@COD: Totally true. I still get matching with the Roth 401(k) which is not tax deferred. Forgot to mention that. But true, matching = automatic interest!
April 3rd, 2007 at 3:40 pm
In my early 20s I decided to max out my retirement each year. My expenses were low so I was able to put as much as possible into my 401k. This saved my about $5,000 per year in taxes and doing this for just a few years really adds up.
April 3rd, 2007 at 3:53 pm
bueller? bueller? =D
ben stein is a smart guy.. boring.. but smart
April 3rd, 2007 at 3:54 pm
The first step is knowing that you need to do something. Take things one step at a time and you’ll eventually be where you want to be.
-limeade
http://fiscalmusings.blogspot.com
April 3rd, 2007 at 4:44 pm
Message recieved loud and clear!
Michael doesn’t have a “how to invest in index funds” video, but I’ll work up an entry specifically about this. Look for it in the next couple weeks. (Dave’s tip in #11 is an excellent way to get started if you don’t want to wait, though!)
April 3rd, 2007 at 4:48 pm
@Chance
I think the value of using 10% is that its a number that is easy to wrap your head around and provides encourging results. If you were to use 5% or 8%, the number may be more realistic, but will also be smaller. This could lead to a feeling of, why bother saving.
Additionally, there are people who are going to charge more than 10% on money they give you, so its good for comparison purposes.
April 3rd, 2007 at 6:08 pm
@ Kevin – Your contributions to a Roth 401(k) grow tax free which is better than deferred (upside). The matching contributions from your employer will grow tax deferred. However, your contributions are made after they are counted as taxable income (downside). So, in the future when you go to use the money, if your tax rate is higher than it is when your making the contributions, you make out. If your tax rate is lower in the future, you would have been better off contributing to the traditional 401(k). If your tax rate is the same then as it is now. It doesn’t matter which you do.
For anyone that wants to know why it matters if you average 10% vs. get 10% every year, see my comment #5 in the previous post, “Saving and Investing: the Power of Compounding.” It can make a huge difference if you are regularly saving or withdrawing.
April 3rd, 2007 at 9:18 pm
The first step to saving is to put money away. It could be an online savings account, it could be an index fund, it could be buying Google’s stock. The important part of this is putting the money away and keeping it away from yourself so you don’t go spend it. Whether it’s 5%, 10% or even 1%, it’s better than if you spent it on your coffee everyday.
Don’t be afraid that your money will be gone. As you age, you will eventually learn more ways you can invest your money in as long as you have a will to learn. I would say that people who read financial blogs already have a good start so not to worry.
My Own Million Blog
April 3rd, 2007 at 10:21 pm
Dylan,
I was interested in your post in the prior thread, and took a stab at looking at your article.
I understand the gist of it (i.e. a big upswing in the market isn’t going to mean much to your money if it happens when your investment is still young, but it will do a lot to skew the average growth), but break it down for me into real terms, because I’m reading parts of your analysis that are confusing me.
What do you mean by constantly saving/withdrawing? Does this make a difference if you’re just socking away the money each paycheck? What lessons can we take away from this in terms of how we invest our money?
April 3rd, 2007 at 10:39 pm
The websites of Fidelity, Schwab and Vanguard have excellent online tools which quickly calculate retirement needs. They are based on expected income, savings and future expenses at times of retirement. Play with these models for ideas of future needs.
April 4th, 2007 at 12:47 am
Kevin P: It sounds like you are (probably) making the best choice available by investing with after tax money now. That is minimising your taxes but you are in different circumstances than a lot of other people.
April 4th, 2007 at 7:34 am
@ NeoteriX – Basically it works like this: If you only invest one time (lump sum, no future contributions) it makes absolutely no difference what the individual returns are, but no one actually saves this way. If you are putting money away with each paycheck, this cash flow “timing effect” (nothing to do with market timing) can have a huge impact on your investments. The danger is in the planning because future cash flow numbers based on a strait-line return calculation will be misleading (unless your talking about a low, long-term fixed rate).
The timing effect is greater, the longer you’re saving (years), and the wider the possible range of returns is ($10K per year saved over 10yrs at a average 10% return, say from a total market index fund, can result in outcomes that will vary by tens of thousands of dollars). So, to correct for this you can either account for standard deviations and build probability models, or for those of us without advanced degrees in probability and statistics, you can over plan by saving more than you think is necessary, aim to build up more than you think is needed, and when you retire, spend less than you think you can. A third option, to avoid deliberate over planning, is to hire a “real” financial planner (many people call themselves a financial planner but don’t actually do planning unless its tied to selling something).
Maybe JD can do a post for Financial Literacy Month on how and when to hire a planner.
@ Chance – You can’t really count on 5% from online banks. 4 years ago those rates were more like 3%, 7 years ago they were at 6%. As short-term interest rates change, so will the internet bank rates.
April 4th, 2007 at 8:10 am
What I’ve learned is something that I call the 70/30 rule.
When we get a real raise or new job with higher pay, our lifestyle inflates. We get a nicer place, nicer car, etc. Yet, life was perfectly okay beforehand.
So what I’ve learned to do is keep living like I’m still out of college, keeping expenses down, living comfortably but not lavishly, and keeping friends who enjoy cheap activities.
As for the 70/30 rule, whenever I get a “real” (accounting for inflation) growth in my income, after taxes, 70% of that gets put into savings of some sort. 30% of that gets to be consumed as reward.
EG:
IncomeY0=100000
IncomeY1=105000
5% Raise
I estimate 2.5% inflation as a base
so, really, 2500. Take out 500 for taxes (if youre good, thats it).
2000 left. 1400 about goes into savings, 600 goes into spending.
April 4th, 2007 at 8:56 am
Okay, here’s something about Roth IRAs that’s puzzled me forever; I’ve read countless descriptions of how they work and have talked about this with financial advisors. Why do people say Roth IRAs are an advantage only if you’ll be in a higher tax bracket when you retire? Unless I’m totally misunderstanding how it works, it seems like Roth IRAs would be the choice no matter what.
With a Roth IRA, you pay tax on your contribution but not on your withdrawals. The key here is that, as I understand it, you don’t pay tax on your withdrawals period, regardless of whether you’re withdrawing the amount of your original contribution or your earnings on those contributions. To me, that makes Roth a total no-brainer regardless of what your future tax bracket would be. Let’s say I contribute $1,000 today to a Roth IRA and pay tax on that today. That tax payment is a drop in the bucket compared with the taxes I’d save if my $1,000 grows to $10,000 by the time I retire and I can withdraw every penny of that $10,000 tax-free. Am I missing something? Everything I’ve read says that both contributions and earnings from Roth IRAs can be withdrawn tax free (free of federal taxes anyway) when you retire. So the fact that you can withdraw your earnings tax-free seems like an enormous win no matter what tax bracket you are in when you retire. I’m sure there’s something I’m misunderstanding here, as it sounds too good to be true.
April 4th, 2007 at 9:25 am
Wow. Lots of young people out there looking for answers on how to get started. I hear this over and over from the people my age that I talk to: “I know I should be doing something, but I’m not sure what, I don’t know where to find the answers, and I’m confused and overwhelmed.”
I’m only 24, but I’ve been obsessed with personal finance and investing since I was 18 or 19. I’m running a series on my blog for the month of April to help other young people in their 20’s sort through the options and understand how to get started.
Please stop by and check it out. It may not fit your situation exactly, but I’ll do my best to point to additional resources and answer any specific questions in the comments.
http://www.ryanwaggoner.com/2007/04/01/investing-for-young-adults-introduction/
April 4th, 2007 at 10:25 am
Brad, the Roth Ira/Roth 401k advantage is in comparison to a Traditional Ira/401k. If you do the math, you will find that you get the same numbers whether you tax now or tax later — as long as you use the same tax rates. Hence the advice about present versus future tax rates.
April 4th, 2007 at 10:33 am
Dylan: Roth investements are often cited as washes (depending on your marginal tax rate), but the real reason for contributing to a Roth fund is that you are effectively invest more into a tax advantaged account. That is, the real advantage of that is that you have effectively (the difference in your withdrawal tax rate) more money invested where you’re not paying capital gains tax. This tax drag can be up to a 1-2% (or more) per year depending on your investment types, so if you do the compounding over time, really adds up and IMO is the real reason to do a Roth account if you can.
Kevin P: diversifying sounds good. What you’re looking for when you do that is different asset classes (Brinson found that 90% of performance variability in pension fund managers came down to asset allocation rather than issue selection; personally as a young person I’d go w/ a mix of only stocks - large, mid/small, and foreign - over 30yr horizon, stock only growth has historically beat stocks+bonds 100% of the time). Also, when you change jobs, one thing to remember is that you can do a direct IRA rollover from your 401k to your own IRA account (both my former/current employers and I use Vanguard to manage everything so that works out well - I even have enough in there now that they’ll do all the paperwork for me, so that’ll be a no-brainer). The advantage is that in your rollover IRA you’ll then be able to select whatever funds you want. I’ve found that Vanguard funds tend to have equivalent performance within asset classes and the lowest expense ratios in the industry.
One other thing to add, that I had to do reading about when I started working and that I’ve always felt was a disservice to young investors - they always pound it into you that you’ll get “heavily” penalized if you do early withdrawal of your 401k/IRA, so you’re pretty much at the age of 2x committing to when you’re 55+… which I think backfires and makes people less likely to save. Turns out that the “heavy penalty” is only 10% (+state penalties, like 2.5% in CA). Now, if you do the math on the matching and the CGT tax you save (this is where Excel is your friend) you’ll find out that you’re better off using a tax-advantaged retirement plan *even if you plan on early withdrawal*. Personally, having a “I’m better off, even if in 5-10 years I need the money” approach really changed the way I thought of it (rather than “I’ll never see this money again until I’m really, really old”).
April 4th, 2007 at 11:39 am
@MossySF: I understand that the comparison is with a traditional IRA, but maybe that’s where I’m misunderstanding: I was always under the impression that with a traditional IRA, your contributions are not taxed but your withdrawals are (including earnings). Having a traditional IRA might make sense if taxes are levied only on the amount of your original contribution, and maybe that’s the case, maybe that’s the piece of the puzzle I’ve been missing. But if you have to pay taxes on every penny you withdraw from a traditional IRA then a Roth IRA should make sense no matter what your tax bracket.
April 4th, 2007 at 12:08 pm
The concept that most people get hung up on while comparing Roth strategies to traditional strategies is equalizing the contributions. Looking at 401(k) first, If you contribute $1,000 to a Traditional 401(k), the net cost to you may be $750 (I assuming income tax is reduced by $250 for this example), and if you contribute $750 to a Roth 401(k) it still costs you $750 net. However, if you contribute $1,000 to a Roth 401(K) the net cost is actually $250 more, and this often tricks people into believing the Roth is always the better deal when in reality, you’ve just increased your savings rate.
For IRA, it is similar except that Traditional IRA contributions are not always deductible so there may be less tax savings now.
Generally, for lower incomes Roth is better. For higher incomes Roth IRA is not an option and Roth 401(k) depends on tax outlook.
Here’s the real rub, take a look at what income tax rates have been over the last several decades; now try to guess what they will be like in next several decades. No one knows.
April 4th, 2007 at 12:16 pm
Dylan, actually, I think you’re missing the point. You haven’t *just* increased your savings rate - if you can max out a Roth account, you are increasing the *tax-advantaged amount* you can save vs a Traditional.
No matter what the final income tax rate is, you’ll have saved CGT-drag on your investments annually (this, incidentally, also makes rebalancing much less tricky).
April 4th, 2007 at 12:17 pm
Oh yeah, one last thing. Capital gains tax plays absolutely no role in either traditional or Roth IRA/401(k). Traditional arrangements are always taxed as ordinary income.
The 1%-2% drag on returns that is often cited is usually to describe the effect of capital gains taxes in actively managed (higher turnover) mutual funds held in taxable accounts.
April 4th, 2007 at 12:18 pm
That should be: Withdrawals form traditional arrangements are always taxed as ordinary income.
April 4th, 2007 at 12:42 pm
Dylan, I think you (and others, I encourage you to review and ruthe numbers) will be surpised at the difference CGT plays on annual returns.
Even for the relatively tax-efficient index funds it’s still not neglible, especially compounded over say 30 years: VFINX is 0.48%, VGTSX is 0.65%. If you’re talking about REIT, bonds, etc. you’re easily moving in the 2%+ range.
The fact that retirement accounts are tax-advantaged over this time period, is again, the point why you want to max that amount. And having more in your tax-advantaged accounts means you can be tax-efficient w/ your asset allocation. Just keep your most tax-inefficient holdings socked away there.
April 4th, 2007 at 3:16 pm
Leonard, I’m not even sure you and I are talking about the same thing, but if we are, we may have to agree to disagree on this one.
April 4th, 2007 at 7:27 pm
Brad, let’s illustrate the math and do a simple 1 year scenario.
Roth IRA:
Earn $1000 pre-tax
Pay 25% tax ($250)
Invest $750
10% return ($75)
Ending Balance: $825
IRA:
Earn $1000 pre-tax
Invest $1000
10% return ($100)
Pre-Tax Balance: $1100
Pay 25% tax ($275)
Post-Tax Balance: $825
Amazing how the ending balance comes out equal huh?
April 4th, 2007 at 11:00 pm
MossySF, real world examples are a good idea!
This might help clarify what I’m talking about (Dylan, Brad, others).
Approaching from a different perspective…
Lets say you have $10K pretax to invest on a 10yr horizon w/ a 25% marginal tax rate both at the start and the end.
If you go w/ a Traditional IRA:
You invest the max 4K (pretax), 10% compounded, 25% lopped off at the end: $7,781.23
You have $4500 (6K pretax) left to invest @ 10% compounded but w/ 0.5% annual CGT, and 15% LTCGT on earnings: $10,154.22
At the end of 10 years, for your $10K you get: $17,935.45
If you go w/ Roth IRA (5K pretax):
You invest the max 4K investment, 10% compounded
end: $10,374.97
You have $3750 left (5K pretax), invested at 10% compounded but w/ 0.5% annual CGT, 15% LTCGT on earnings: $8,461.85
At the end of 10 years, for your $10K you get: $18,836.82
Amazingly, the ending balances *don’t* come out equal.
In fact, that’s a +9% ROI, which isn’t too shabby for having done nothing different except choosing the Roth IRA v the Traditional w/ the same amount of pre-tax money. (And the difference will keep increasing as your time horizon grows, at 30 years for example, this will be a ~+75% ROI).
In fact, anytime you have at least the post-tax equivalent amount to invest (ie, starting w/ $5K in this example) the Roth IRA will always perform better.
Why is this? It just comes down to the fact that you are investing more money that’s tax-advantaged.
So yes, if you only have $1000 to invest, it’s a wash, but if you have more than the Roth limit you want to save (and are below the Roth income limits, which are sadly, sorta low for non-married individuals) that’s the way to go. (well, perhaps with the exception of where the pretax difference bumps your tax bracket, but I’ll leave that for you to do the math on)
Dylan, this I think illustrates where we disagree - CGT is at the heart of choosing between a Roth and Traditional. In the case where you can invest beyond the Traditional’s pre-tax max, the Roth simply lets you invest more money that’s taxed advantaged where you never pay any CGT, LT or ST.
(You’ll note that the difference is more than that of just the compounded tax-drag, which assuming 0.5% is 5.1% over 10 years - that’s because when you’re investing regularly, not only do you put in the money post-tax (-25%) but on cashing out, you also incur LTCGT (currently 15%).)
April 5th, 2007 at 5:40 am
@MossySF: thanks, that’s the clearest explanation I’ve seen so far, and now I can see what the problem is: your analysis (and all the others I’ve seen) assume that you will invest less in a Roth up-front because of the taxes. In actual practice, though, that’s not what most people do. Most people would contribute the maximum (in this hypothetical case the full $1,000) to their Roth; the $250 comes out of their taxes due on April 15 (at least that’s the way it worked for me, but maybe that’s because I created my Roth IRAs as conversions from my existing traditional IRAs). You can’t assume they would have put that $250 toward their Roth IRA investment, especially if they’ve maxed out their Roth contribution. So I would argue that in the example above, you’re actually investing the full $1,000 in the Roth and your ending balance is $1100 compared with the post-tax balance of $825 for a traditional IRA.
April 5th, 2007 at 8:50 am
Brad, now you’re talking about psychology. Most people don’t contribute a single dime to anything. The small percentage who do contribute are rarely faced with the choice of Traditional IRA versus Roth IRA. They usually can’t even contribute to a Traditional IRA because they are covered at work by a 401K/403b/SIMPLE-IRA/SEP-IRA/Keogh where the limits run anywhere from 10K to 44K.
April 6th, 2007 at 11:04 pm
[...] of Get Rich Slowly also shared his thoughts on these six points, and believes the most important factor in retirement savings is [...]
April 7th, 2007 at 7:20 pm
Leonard Lin - Please check your numbers.
In order to put $4000 in a Roth, you must have $5333.33 in income. That extra $333.33 greatly inflates in the value of the Roth over the Traditional IRA, although the Roth still does come out ahead, according to my calculations.
April 10th, 2007 at 2:11 pm
Especially for young people now, it’s hard to find the money. I have a double degree, high GPA, and excellent references. I’m smart, capable, traveled, and have interesting experiences. I make 13 dollars an hour, and I’m ahead of most of my peers. Paying rent in a city, furnishing an apartment (I moved in with *nothing* in the way of appliances), and some living expenses really whittles away. I took the plunge - my bi-weekly paycheck takes out $100. A lot for me - and yet not enough to retire well. I’ll turn 25 in May. I would like to go back to school soon - make more money so that I can live, save, and do things like travel. For most of the people I know, even covering living expenses is a hardship.
April 10th, 2007 at 2:38 pm
@Dav, you might want to reconsider the idea of going back to school, depending on what your field is. Through my life I’ve found that good employers tend to value experience over degrees (if an employer won’t interview me simply because I don’t have an advanced degree, I probably wouldn’t want to work for someone that closeminded anyway). I only have a BA, yet I’ve beat out people with Masters and PhDs on a few of the jobs I’ve had over the years, and I doubt I’d be any further along in my career path today if I had an advanced degree. Of course in some fields an advanced degree is necessary or at least helpful, but in many cases you just have to slog through your twenties and build up experience before you can qualify for the higher-paying jobs. I don’t know how things are now, but when I was in my 20s everyone I knew was sharing an apartment with roommates and pinching pennies. I only knew one or two people in their 20s who had their own homes or significant savings, and they had help from their parents.
April 20th, 2007 at 7:23 am
Peter, you’re right, the I totally flubbed the post-tax amount for the Roth. With the corrected figure I get a 3.37%+ ROI for the Roth after 10 years, and a 43.62%+ ROI for the Roth after 30 years.
This time instead of the back of a napkin, I put it all into a spreadsheet.
http://randomfoo.net/junk/200704/trad_vs_roth.xls
August 6th, 2007 at 6:31 am
[...] Ben Stein: Keys to Retirement Savings A nice discussion of Ben’s principles when it comes to retirement savings, along with a very healthy discussion. (@ get rich slowly) [...]
January 8th, 2008 at 11:58 am
There have been a lot of really good posts here about retirement savings. I work for Fulcrum Financial Inquiry, which is a Registered Investment Advisor, as well as a fully licensed CPA firm. Recently, we have introduced an easy to use retirement savings calculator which I thought might help some of the readers of this blog. The links are:
http://www.fulcruminquiry.com/allocation.htm
http://www.fulcruminquiry.com/RetirementPlan.html
Check it out if you have time and I really hope this helps (especially some of the younger audience).
April 3rd, 2008 at 10:05 am
An unmentionedl advantage of a Roth over an IRA is its inheritance treatment. An heir to a regular IRA has to liquidate it within 5 years (and pay the income tax!) With a ROTH the heir must take distributions based on his or her life expectancy (with no income taxing). Naming a grandchild as an heir really makes a ROTH a true golden goose whose many, many eggs are never taxed. (But don’t tell Congress!)
March 27th, 2009 at 6:11 am
COMMENTING A YEAR LATE! :^) …
The tax advantages to contributing to my husband’s 457(b) (pre-tax accounts)are great…he can contribute up to $16,500/yr. (2009) in all types of investments and this (along w/other, unrelated exemptions and deductions) knocks us down into the 15% TAX BRACKET. I think that the contribution limits on a Roth are low (5 OR $6,000?), but am I correct that both of us can contribute the max to two different Roths?
While the 457(b) contributions aren’t matched, it saves us a lot of money at tax-time. (457’s are deferred compensation plans for government employees, such as police, so not open to everyone. One great benefit is that you can take out the contributions and interest anytime w/out penalty as long as you have had it for at least 5 years. However, you will pay ordinary income tax upon withdrawal).
September 18th, 2009 at 3:09 pm
The thing is to save. You are young, so put as much as you can away. Don’t worry about small amounts. Small amounts over a period of time really count up.