Archive for the ‘Retirement’ Category:
We don’t have any huge financial goals right now, so we thought we’d set one: maxing out both of our IRAs. We’re already contributing to retirement, but we figure more is better while we’re young and don’t have other pressing needs. We skipped out on IRA contributions for most of 2011, so we’d like to catch up.
We’re putting a little bit extra toward our mortgage (since even small contributions make a big impact) and we’re contributing some to our kids’ 529 college plans.
For our age, we can each contribute $5,000 to our IRAs. We’ll have until tax day in April 2013 to make all of our 2012 contributions.
We set up automatic transfers from our bank to our IRAs at Vanguard, to occur a few days after each payday.
Until recently, we were contributing $116/each biweekly ($3,016/year).
The other day, I adjusted our automatic contribution to $125/each biweekly. Bumping it by just $9 means an extra $234 per account, or $3,250.
Even increasing our contribution by $4 on a biweekly basis would add $104 more per year.
Shane was blessed to receive a cost-of-living raise effective in his most recent paycheck. We took most of the increased amount and set up an automatic bi-weekly transfer to go to a new sub-account at our bank at ING Direct. The sub-account is labeled “IRA.”
Bi-weekly, $50 will go to the IRA sub-account. In a year’s time, we’ll have $1,300 there plus a few dollars in interest.
Why not put that $50 in our IRAs at Vanguard from the get-go?
Well, I’d like to have a little bit of a buffer. If the tax laws and credits change this year, it would be nice to have some additional money in savings so we can pay our taxes if we need to. Or, we could use the money for another purpose (like a medical deductible). If nothing comes up between now and then, we’ll put $650 in each IRA.
That brings us to a hypothetical $3,900 in each IRA. “Just” $1,100 each to go.
It sounds like a lot of extra money to scrape together, especially when we’re already doing our darnedest to save.
Before I calculated the exact dollar amount, it was so vague that it wasn’t even a goal. Now, we know we need to come up with an extra $2,200 somewhere, total.
Shane will have a third paycheck in June and again in November. After all the other bills and savings goals are accounted for in those months, we should have a few hundred dollars available to put in the IRA (or IRA savings fund, whichever).
Second, he is supposed to receive a bonus twice per year. Assuming that goes as scheduled, we’ll be able to tap some of the bonus money for the IRA. If the bonus goes away, well…we weren’t counting on it for something critical so it’ll be ok. We’ll be disappointed, but we’ll be ok. :)
Other income sources to fund the remaining $2,200:
- My blog earnings. It’s drying up fast over here, though and I think it has to do with the “big G’s” search changes. Ugh.
- Selling unwanted things on eBay, as always
- Our tax refund from 2011, assuming we don’t spend it all elsewhere we’re replacing our kitchen countertops and doing some things to the yard) and then our medical expenses from a few days ago.
Thanks for sticking with me on this retirement series! It can be complicated stuff and I hope I treated the subject matter with the clarity it deserves. This is big bucks we’re talking, after all.
When should you start funding your retirement account while getting out of debt?
As with all questions, the answer is “it depends.” Some financial advisors suggest not contributing to retirement until your debts are paid and you have a starter emergency fund.
Dave recommends stopping your contribution to retirement plans and investments for as long as it takes to get rid of your debt (excluding mortgage payment). Do not withdraw from your retirement plans; just let them sit while you conquer your debt. Then, after everything is paid off, start contributing toward your retirement plans again. — Dave Ramsey
I disagree. I think it’s risky to miss out on an employer match, especially if if takes a year or more to pay off your debt. Dave reasons that if you’re throwing all of your money at debt, it’s a bigger debt snowball and you’ll be out of debt sooner because of that. Maybe.
If you truly are struggling to make traction with your debt pay-off, then maybe it does make sense to be aggressive with debt and hold off on retirement for awhile. But if you’ve got a small emergency fund and are making steady progress with an end in sight, I think it makes sense to at least contribute enough to get the full company match if available.
For most of 2011, we only contributed enough to Shane’s 401(k) to get the full match. Beyond that, we were saving like mad to have enough to put 20% down on our house. In 2012 we’re trying to catch up. I’m glad we didn’t stop our entire retirement contribution.
Where does retirement fit in with saving for kids’ college?
Retirement should trump kids’ college. Well-meaning parents don’t always see it that way. I think of it like this: Kids can come up with a variety of ways to pay for college — part-time jobs, scholarships, testing out of certain classes, loans and more.
The same can’t be said for retirement. You might not physically be able to work into your 80s+. It’s better to prepare for your own retirement over your kids’ college.
Final things to keep in mind
- Don’t put off planning for retirement. Seriously! If you can’t contribute right now, come up with a plan for how you’ll get to that point, and when.
- If you can’t invest as much as you’d like right now, at least invest something. It’s easier to gradually bump up your contributions than it is to go from 0 to 10% at once. Plus, the contributions do add up.
- Pay attention to fees. Keep your expense ratio under 1% and avoid paying front or back-end loads.
Next, I borrowed the audio and Kindle version of I Will Teach You To Be Rich* from the library. It’s now on sale for $2.24 for Kindle right now, so I bought a copy since it contains material I will probably want to reference later. The title is arrogant and if you don’t like the blog then you won’t like the book.
This book features more financial basics and it doesn’t focus on the entrepreneurial aspect of money like his blog is doing lately. Despite the tone, I think the author has a lot of good info and 20-somethings will probably learn from it.
Posts from the series, in case you want to go back:
Go here to see our retirement calculator, created by my husband, Shane.
- Series intro: From drugstore deals to retirement
- How do you want to spend your retirement years? This part is about planning your time spent; not planning the financials.
- How much money will you need to retire? This post will help you figure out your hypothetical retirement expenses. From there, we’ll calculate how much that will be in inflated dollars, and we’ll also factor in pensions and Social Security to get a final ballpark of how much we’ll need in our nest egg at retirement.
- How much should you save with each paycheck to reach your goal? For some people, 10-15% will be plenty, but it’s a rule of thumb that won’t fit everyone’s situation.
- Where should we invest our retirement funds? Talking about 401k and IRAs, and setting up your IRA
- How to choose your retirement investments in your portfolio. What’s a large cap fund? Are index funds a good choice? How can we decide on specific investment options in our 401(k) or IRA?
- How to choose your asset allocation. How much of your portfolio should be stocks or bonds? Breaking it down further, how much should be large cap, small cap? Here are some ideas to get you started.
*Amazon affiliate link. See disclosure policy