How we saved one year’s salary in Roth IRAs in grad school

This reader story is from Emily, a graduate student living in North Carolina who blogs about transitions in young adulthood and living well on less at Evolving Personal Finance.

Some reader stories contain general advice; others are examples of how a GRS reader achieved financial success or failure. These stories feature folks with all levels of financial maturity and income.
 

My husband, Kyle, and I recently reached our first retirement savings milestone — we have one year's salary in our Roth IRAs! Since joining the PF blogosphere, we have seen many bloggers and commenters with high incomes and modest lifestyles reach that kind of milestone in their 20s. But we're ecstatic that it has only taken us six years post-college to do the same because we've been in graduate school this entire time, each earning about $25,000 or so per year.

We easily could have let ourselves off the hook by saying that our income was too low to start saving during school, or it wouldn't matter in the long run because our incomes will increase so much after we graduate. But I'm pleased with what we have to show for our efforts, even if we're set way back from the “one year's salary” milestone once one of us gets a “real job.” The money we have in our Roth IRAs (contributed while we were in the 15 percent marginal tax bracket) has the advantage of those few extra years to add to its time value. We could have just kept our heads above water over the last six years but instead we saved consistently and now have something substantial to show for it!

We haven't killed ourselves to reach this goal, either — our budget is quite reasonable and we have many little luxuries and splurges. We are simply reaping the benefits of “paying yourself first.” The purpose of this post is to convince those of you with lower incomes (and those with higher!) that it is possible to save for retirement and quickly build a nice nest egg.

Who Are We?

Kyle and I graduated from college together in 2007. He immediately started working on his PhD, whereas I had a post-baccalaureate fellowship for one year before enrolling in a PhD program at his university. We are in STEM fields so our tuition and health insurance are paid by our departments and we are given stipends for living expenses. I like to say that grad students are expected to work for free and our universities pay us just enough to enable us to do it! We are not allowed to have outside jobs to supplement our stipends, and we don't have access to workplace-based retirement plans.

Kyle expects to finish his PhD this fall and I have about a year left. We were married in 2010; prior to our wedding we had separate finances, and after it, we moved in together and started keeping completely joint finances. We live in Durham, N.C., which has a cost of living that closely matches the country's median. As we grew up in high cost of living areas, Durham feels very affordable to us.

Where Were We?

I'll give you a quick rundown of our financial situations in the summer of 2007 so you know what our starting point was.

Kyle had a few thousand dollars in cash savings from summer jobs and graduation gifts from his relatives when he moved to Durham. His parents formally gifted him the car he had been driving since 2004. His starting stipend was about $25,000 per year.

I had close to zero cash when I started my post-baccalaureate year and about $17,000 in student loan debt from my undergraduate degree. I was paid about $24,000 per year for my fellowship in the D.C. area. For the first half of the year I lived with my parents (I paid them $500 a month for a rent-equivalent) and in the second half of the year I lived independently. In August 2008 I moved to Durham to start grad school and my stipend was again about $24,000 a year. At that time I also bought a car with a $3,500 car loan.

Where Are We Now?

We have received cost-of-living increases to our stipends yearly and are now earning about $27,000 and $26,000 per year. We have approximately $57,000 in our Roth IRAs. I still have $16,000 in student loan debt, but we have $18,000 set aside in taxable investment accounts and CDs to pay off the debt as soon as it comes out of deferment. We also have between $14,000 and $18,000 in checking and savings accounts, depending on the day of the month. We have no additional debt except what happens to be on our credit cards, which we pay off monthly. All in all, our net worth is around $75,000, not counting our cars and other possessions.

How We Got Here

Starting early and saving consistently

Right after I graduated from college in 2007, I read a few personal finance books and was convinced to start saving for retirement. (I guess I missed the part where most 20-somethings think they are too young to start saving!) I set transfers to my Roth IRA to be 10 percent of my gross income or $200 a month, just like the books told me to. I didn't convince Kyle to start saving until 2009, but when he did he went big and maxed out his Roth IRA each year, in a lump sum in the first year and with weekly transfers in subsequent years. I was inspired by his example and slowly increased my savings percentage, even though with each increase I couldn't predict how I would be able to swing it. We now save about 17 percent of our gross income, which falls somewhat short of maxing out two Roth IRAs.

Tracking and Budgeting

Kyle is naturally a fairly conservative spender, while I have to put systems in place to keep me from blowing all my cash. I started off tracking my spending using Excel, but Kyle preferred letting Mint do the heavy lifting, and that's what we switched to after we got married.

Our budget puts first things first. From our gross pay, we have taxes withheld, we tithe and give offerings to our church and other charitable organizations, and we transfer money to our Roth IRAs four times per month (we are very into dollar-cost averaging!). Then we take care of our necessities such as rent, utilities, food, and gas. We also have a little bit of money in our monthly budget for going out to eat. At the end of each month we zero out our checking account, rewarding ourselves by putting the excess money into a savings account for a fun purpose like travel.

Most of our fun, discretionary spending comes from our targeted savings accounts. Every month we divvy up about 20 percent of our pay into various accounts for irregular expenses. Some of the accounts are boring necessities like car repairs, insurance, and dental and eye care. But we also have accounts for travel, entertainment, electronics, and clothes purchases. We started this system right after we were married when we were hit with more wedding invitations than we could accept and needed to pay for some season tickets all in the same summer.

I like this budgeting system because the savings parts are so automatic and unthinking — we don't have to make the decision each month of how much to put into each of the categories, including retirement. The aspect that does change every month, and therefore captures more of our attention, is how much leftover money we'll have to put toward something fun (currently a DSLR), which keeps us feeling positive about the whole process.

Living Well on Less

We made a few key choices that have helped keep our monthly expenses in check.

  1. We own outright two older used cars. (I paid of my car loan before we got married.)
  2. We always lived with roommates until we were married. We chose safe but modest apartments and townhouses and have actually decreased our rent with each of our last two moves (while keeping the same square footage).
  3. We learned to cook and stopped eating out for convenience. We only eat out for dates or group social events.
  4. We continually strive to find ways to improve. We both used to spend money in ways that didn't provide much value, but over time we have found and reduced many of those instances so we're using our money for more and more high-value purposes. For example, we stopped spending money on fast food and chose to buy a CSA.

Good Fortune

Success often comes from a mixture of hard work and good luck: I made a mistake when I started my Roth IRA that actually turned out to be a boon. I never actually implemented my decision of which stock fund to invest in, so all my saved money was going into cash-equivalents. I didn't realize my mistake for about a year, and then I chose to not make any changes for about six months until I had enough savings to open an IRA with Vanguard. I finally got my Roth IRA into the stock market in January 2009; Kyle also maxed out his Roth IRA for the first time in 2009. Basically, we got in at the rock bottom of the stock market, and its incredible growth over the past few years has made a huge contribution to our balances. An additional but less tangible benefit from that mistake is that now we are much more on top of our investments and balances — I'm too embarrassed about my oversight to completely “set and forget!”

What Else We Could Have Done

I would love to be able to say that we maxed out our Roth IRA contributions every year, and if we had been we would definitely have a higher balance! It took us years to refine our spending and budgeting to get to our current savings level.

If we had decided that nothing in our life was as important as maxing out, we could do it. The areas of our budget that we could cut back on are: renting a 1 BR place instead of a 2 BR, traveling only once or twice per year, buying cheap food, and using less expensive electronics for longer. But we believe in striking a balance between our long-term goals and our daily lifestyle, so enhancing our day-to-day experiences is important to us as well.

Our success in saving so much for retirement is largely due to consistently applying quintessential Get Rich Slowly advice and putting systems in place that make it automatic. Even though we are in a unique time in our lives and don't have “real jobs,” we choose to live within our means by sticking to our percentage-based budget and are already seeing the benefits.

More about...Budgeting, Career, Retirement

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Elizabeth
Elizabeth

Wow… good for you! What an amazing story. I love how you made it a priority to give to others too.

Matt @ Your Living Body
Matt @ Your Living Body

Agreed….great story. I’m forwarding this to my wife.

Alicia @ Financial Diffraction
Alicia @ Financial Diffraction

So this is the post you referred to on EPF where you laid the numbers all out there – and what numbers they are!

That is very impressive during grad school, and definitely not the norm. I wish I had been that smart and tried to max out my TFSA (similar to a Roth IRA) during grad school, rather than now playing catchup with a lot of contribution room – it is rather daunting rather than plugging away at it.

Great job to you and Kyle!

Emily @ evolvingPF
Emily @ evolvingPF

Thanks! One of our motivators was definitely to not waste the contribution room we have had during these years.

The numbers in this post are about 2 months old now, so I posted our current net worth today over on our blog – there’s been a big increase since August!

Elizabeth
Elizabeth

Does contribution room not accumulate?

I’m just curious. In Canada, unused TFSA room carries over.

Emily @ evolvingPF
Emily @ evolvingPF

Oh right, I forgot about that! Yes, in the US you lose the contribution room for a given year if you don’t contribute to an IRA by April 15 of the following year.

Elizabeth
Elizabeth

Thanks for the response! I always wondered why Americans were so worried about maxing out their contributions each year.

I think our TFSAs (tax-free savings accounts) are probably the closest thing we have to Roth IRAs. Everyone over the age of 18 gets the same amount of contribution room each year (currently $5500) and the unused room carries over.

MMD @ My Money Design
MMD @ My Money Design

Wonderful job Emily. You and your husband were able to do a whole lot more with so much less than what most people earn. And the best part is that you were able to accomplish it all with simple discipline and control.

The real question going forward is if you will be able to maintain the same low-overhead lifestyle structure after those PhD’s are put to use as your careers flourish.

Emily @ evolvingPF
Emily @ evolvingPF

Thanks so much for your encouragement!

The beauty of the percentage-based budget is that it’s flexible for your income. 🙂 We definitely plan to increase our lifestyle after we get our real jobs, though we don’t want that to look like (mindless) lifestyle inflation. I want to increase our savings rate as well, although that will be split between long-term and medium-term goals – right now our only specific savings goals are for the long-term.

Aaron Davidson
Aaron Davidson

How do you cook well after work? I am assuming both of you work until 5ish, and then have some sort of commute.

Emily @ evolvingPF
Emily @ evolvingPF

Batch cooking all the way! I actually eat dinner at school at least half the time so I’m often packing lunch and dinner. I basically only cook on weekends and when I have evenings at home and the rest of the time is reheating. The slow cooker is my friend! I also recently started batch-cooking my breakfast, which is saving a lot of time over cooking it fresh every morning.

Ginger
Ginger

I want an example of some of the recipes you are batch cooking for breakfast. Also can I link to your blog from mine? I’m a master’s student and my husband is a PhD student, so I am thinking your blog may be very useful to read.

Emily @ evolvingPF
Emily @ evolvingPF

Sure, feel free to link to my blog! I love to connect with other grad students who are interested in PF, particularly bloggers. I’ll just warn you that my perfect breakfast includes a lot of vegetables, so an egg casserole seemed like a good choice (before this experiment, I’d been scrambling eggs and sauteeing vegetables or making vegetable omelets). The recipe I’ve been playing with the last few weeks is http://www.cookincanuck.com/2012/10/baked-egg-breakfast-casserole-with-mushrooms-spinach-salsa-recipe/. My variation has 3 eggs, 3 oz of mushrooms, and 1.25 cups of spinach per serving. I have also substituted feta cheese for the salsa and I like it… Read more »

Aimee
Aimee

When I was in grad school (graduated in May) I rarely left before 7pm — and that was considered early! Cooking more frequently is one of the best things about being a real person with a real job. 😛

Emily @ evolvingPF
Emily @ evolvingPF

I enjoy the time savings of batch cooking so much that I’m not sure I’ll give it up even when I’m home for dinner more often! Congrats on your real job!

Kelsie
Kelsie

Great job! It’s easy to find excuses not to save, but hard not to use them.

Micro
Micro

Wow, congrats on having so much saved up and for getting your PhD (I know you have a year left but still). Are you planning on doing research once you finish or are you going to head out into the private sector?

Emily @ evolvingPF
Emily @ evolvingPF

My husband plans on doing a postdoc and then continuing his research in industry. I want to have an “alternative” career – something that uses my degree but not necessarily my specific research area (and is not at the bench). I don’t know quite what that will be, especially because I will be the trailing spouse.

SLCCOM
SLCCOM

You could consider science or technical writing. That can be done freelance, or as an official job.

Emily @ evolvingPF
Emily @ evolvingPF

It’s on my short list. 🙂

Ebie
Ebie

Very impressive! I’m also interested to hear that you were both eligible for Roth IRA contributions every year – were your stipends reported as W2 income? As a graduate student and now postdoc, my fellowship stipends are taxable but not considered earned income. I have only been able to contribute in years where I have additional W2 income. Very nice work, you two! So few graduate students are thinking ahead to retirement….

Emily @ evolvingPF
Emily @ evolvingPF

Ugh, I am so annoyed by the whole ‘earned income’ distinction. I frequently rant about it on EPF. 🙂

As for contribution eligibility, it definitely helps to be married because you can do a spousal contribution! It’s also very nice that the school year doesn’t match up with the calendar year.

What kind of extra W-2 income have you had during grad school/postdoc?

Ebie
Ebie

I recieved W2 income in years that I taught, or where I had gaps in fellowship coverage – I also tutored a little on the side occasionally. (This is of course technically against the rules in most graduate programs; we aren’t really supposed to have “outside” employment…) Thanks for telling your story, and sparking such interesting conversation! I’ve always found it so strange that the IRS and universities allow graduate students to fall into such a grey area in terms of income and taxes. In my program, about half my colleagues filed quarterly payments and reported 1099-MISC fellowship income –… Read more »

Emily @ evolvingPF
Emily @ evolvingPF

I ran across one woman at my university who got to her 4th year before finding out she was supposed to be paying income tax! I think most people figure it out in their first years just by talking with peers. At my university we’re making a push to get all the fellowship students to set up withholding right when they set up their direct deposits so 1) they know they have to pay taxes and 2) they don’t have to both with filing quarterly estimated taxes. It is very confusing for fellowship students who haven’t had taxes withheld because… Read more »

Esther
Esther

WOW, you motivate me. Thanks for sharing your story. It’s a great accomplishment, especially in grad school. I am starting Grad school in January and was concerned how I was going to accomplish my financial goal. But your story makes me believe that I, too can do it.
Keep up the good work and good luck on finishing your PhD.

Jennifer B
Jennifer B

I don’t know if you choose the title for this article or if someone else does.

You mentioned your good timing in getting your investments into the stock market. So at least a portion of your “savings” is stock market gains.

It would have been helpful to understand about how much of your current Roth balance is money that you’ve contributed and how much of it was earnings, especially since you’ve mentioned that you do not max out your contributions each year.

H
H

I can give you an idea. I’m in a similar position, where my husband and I are both in STEM grad school in our late 20s/early 30s; we both make about $25,000 a year, and we have (similar to them) $64000 in Roth IRAs. Of this amount, ~$50,000 are contributions, and $14000 are earnings. My student loan from undergrad is ~$6000 (and it’s in the process of being paid off at a very accelerated rate). We save about $500 a month in cash. We own a home and have made slightly different choices about how to allocate extra money, so… Read more »

Emily @ evolvingPF
Emily @ evolvingPF

Wow, you have done an amazing job! Let me know if you ever want to tell your story in a guest post on my blog.

We have more cash on hand than I would like, actually. We’re overdue for a reallocation. Maybe we will be able to max out our Roth IRAs this year with a lump sum!

Diane C
Diane C

I agree that “Earned” would be a better word than “Saved” for the headline. Technically, the writer did not save that much money, but she (and her DH) did earn it, which is most impressive.

Emily @ evolvingPF
Emily @ evolvingPF

I chose the title – sorry for the confusion! I agree that the balance is not the same as what we saved, although the balance is what matters most to me. I don’t know how I would have phrased that more accurate concept concisely. 🙂 I just checked my account and it looks my contributions amount to a little more than 2/3 of the current balance. My husband’s would have a slightly higher proportion since he started later. I’ve never looked at that figure before and I’m pretty impressed by the gains in this short period of time! It really… Read more »

Tim
Tim

Hi Emily,

Are the stipends you receive considered earned income? I was quite disappointed when I started grad school that my stipend was not considered earned income, because I wasn’t considered an employee. A side effect of this was not having to contribute to Social Security, but I’d have rather been able to contribute to a Roth.

Emily @ evolvingPF
Emily @ evolvingPF

I have written many times on the subject of grad students and earned income! It was very difficult to find definitive information but I think I finally cracked the code. Please see my post: http://www.evolvingpf.com/2012/03/earned-income/

Tim
Tim

So you actually received a W2? Lucky you!

I went through a similar search as you, to figure out 1) whether I owed Social Security taxes; and 2) whether I was eligible to contribute to an IRA. I eventually found some tax court cases that pretty well settled that for me, the answer was no to both.

Emily @ evolvingPF
Emily @ evolvingPF

Yes, we have W-2 pay (except until last month for me http://www.evolvingpf.com/2013/08/decrease-in-pay-acknowledgement/). You probably found this out but I don’t want anyone else listening in to be confused – students still get the payroll tax exemption even if they are paid with W-2s if their income results from pursuit of their degrees.

Susan
Susan

I came to a similar conclusion as Tim. I did not receive a W-2 and unfortunately was unable to contribute to a Roth IRA while in grad school. I had already been contributing, and found out I shouldn’t be contributing when I did my taxes with TurboTax. I decided to pay about a $60 penalty each year to keep the money in the Roth IRA and invest outside or retirement accounts until my husband and I finally had earned income. I think this is certainly a tricky subject. I spoke with a financial advisor who said I was ineligible to… Read more »

Emily @ evolvingPF
Emily @ evolvingPF

@ Susan You know, we had some confusion over that Making Work Pay credit as well! My husband and I both claimed it; we were both rejected by the IRS; we both called to argue with them; he won and got the credit, I didn’t. Our documentation was all the same for that year. It just convinced me that the IRS can be just as confused over this earned income issue as we are. (Well, I’m not so much confused as offended, as you can see in my Earned Income post.) I’m glad to see you’re saving for retirement as… Read more »

Tim
Tim

Alright, your last comment would be news to me. This year my funding switched from an individual fellowship (no W-2, not considered earned income) to coming out of my advisors NIH grant. I assume I will be getting a W-2, as I am most definitely having FICA taxes (and other taxes affiliated with earned income, such as unemployment taxes) taken out of my paycheck. My understanding was that this was true of all graduate students paid out of advisors’ NIH grants. Are you suggesting that I should be exempt from payroll taxes? How would I even go about claiming that… Read more »

Emily @ evolvingPF
Emily @ evolvingPF

I think you should talk with your payroll office. Here is some documentation I found: http://www.evolvingpf.com/2013/01/egg-on-my-face-grad-students-and-payroll-taxes/ Just because you are eligible for an exemption doesn’t mean you have to take it, and maybe they opted you in for some reason.

Also, if it wasn’t clear, I am NOT a finance professional so you shouldn’t listen to me. But I know I haven’t paid payroll taxes during grad school (while working as an RA not TA, which might be important).

Tim
Tim

It looks like monies provided under NIH grants cannot be used for fellowships or scholarships. They can, however, be used to pay wages, including tuition remission. (source: http://grants.nih.gov/grants/policy/nihgps_2012/nihgps_ch7.htm#preaward_preagreement_costs)

So it looks like there’s no way to pay graduate students supported by NIH grants other than as employees.

Emily @ evolvingPF
Emily @ evolvingPF

From the reading I’ve done, the key distinction is not whether you are classified as an “employee” but how exactly you are paid (W-2 vs. 1099 MISC box 3) and whether you are classified as a “student.” People can be both students and employees, though they are not the same as employees who are not students.

Tim
Tim

Well, the NIH document I just linked to specifically refers to “wages.” That means FICA.

Emily @ evolvingPF
Emily @ evolvingPF

I disagree but I love your skepticism! I’ll just say that I rarely come across grad students who pay payroll taxes – I have solicited this information on my blog and IRL – and those who do seem to be having them withheld because they are being paid as TAs (though not all TAs have them withheld). You are in an unusual position, which makes me think someone has made a mistake. So if I were you I would turn your research skills to figuring out why you DON’T have to pay payroll taxes and prove that to your payroll… Read more »

Tim
Tim

Unusual position in general, perhaps, but certainly not at my school (the NIH funds the overwhelming majority of labs at my institution). In fact, I’m not even losing out on money because when I switched funding sources, they increased my stipend so that my take-home would be the same after the increased taxes.

Emily @ evolvingPF
Emily @ evolvingPF

Oh, I’d wager most of the students I’ve polled are paid by NIH as well. But if they are increasing your pay to compensate for opting you in the taxes, I’d take that too. There are definitely advantages to paying payroll taxes earlier in life. Can you send me an email so we can talk about this further?

Tim
Tim

Gladly – e-mail sent.

Tim
Tim

Also, lost in this thread is the impressiveness of saving a years salary inn Roth IRAs in grad school. Very nicely done; congratulations!

Tara @ Streets Ahead Living
Tara @ Streets Ahead Living

Great job on reaching the milestone! Also I wanted to second your comment on living with roommates. Sometimes if you find the right place, living with roommates is cheaper than finding a one-bedroom to share with a significant other. If the rent is right and the roommates mesh well, it’s best to do it on the cheap!

kevinkrieger
kevinkrieger

That’s interesting. Thanks 🙂

MoneyAhoy
MoneyAhoy

Wow! That’s an amazing story! Terrific progress on reaching this milestone! I’m just starting my Roth IRA investment now, so I have a lot of catching up to do!!!

Jeff
Jeff

You two have done an incredible job. Great work.

ER
ER

This is awesome to read! I’m 3 years post college and have just reached a (smaller but almost proportional) milestone in my own Roth on a similar yearly salary, it feels good man! I work in a STEM lab with two grad students- one sounds very much like you and the other the complete opposite. The one who has it together brings her lunch to work every day, has bought a small house and has roommates whose rent pays her mortgage and a little towards retirement. The other lives with her parents, paying virtually no rent but buying starbucks daily… Read more »

Emily @ evolvingPF
Emily @ evolvingPF

Your coworker is spending almost 100% of her net pay on discretionary purchases and a car lease? Wow. At least if she ever wakes up she’ll have you and your other coworker to go to for coaching! Great job on your savings!

Courtney H.
Courtney H.

Congrats! My husband and I did a similar thing when I was in grad school. He had a regular job but I only got a $15k/year stipend with my Masters program. We fully funded our ROTHs with my stipend and lived off of his income. I wanted to save as much as possible in our retirement accounts while we were young and before we had large daycare expenses. Now I am only 28 and my husband is 30 and we have over $115k in our ROTHs and 401ks combined. It is nice to have that cushion there since now that… Read more »

Emily @ evolvingPF
Emily @ evolvingPF

Great job! That is so smart to live off your husband’s income and bank your stipend. I have also been thinking that saving so much for retirement right now will enable us to cut back later without underfunding (or at least give us the option), like you have. In our case, that might be due to daycare or saving for a house downpayment.

Jill
Jill

Your story inspired me to make a more conscious effort when it comes to sticking with my budget! Good job!

Roger Ledoux
Roger Ledoux

Very inspiring.

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