Roth IRA | Well Heeled Blog

What Percentage of Income Do You Save for Retirement?

Written by WellHeeled on December 7, 2011 · 28 Comments

Retirement. The 800-pound gorilla in the personal finance room. You can’t talk about personal finance without talking about retirement. And you can’t talk about retirement without talking about how much you are saving for it.

I was reading on Bruce Bucks when this note caught my eye: according to personal finance expert Liz Weston’s financial rules of thumb, you should:

Save 10% for BASICS, 15% for COMFORT, 20% to ESCAPE. This rule of thumb works pretty well if you start to save for retirement by your early 30s. Saving at least 10% of your income ensures you won’t be eating pet food. Fifteen percent should get you a more comfortable living, while 20% gives you a shot at an early retirement (and yes, you get to count employer contributions as part of your percentage). Wait just a decade to start, though, and you’ll need 15% for basics and 20% for comfort; an early retirement may not be in the cards.

Wow! Those are some pretty big figures… We Americans aren’t exactly known as big savers, and I’d bet that most of us are not anywhere saving near the level necessary to escape into comfort. Recently, some experts are telling folks that they are saving too much money for retirement – after all, we might downsize our homes, we don’t need to buy business wear, maybe we can become a one-car or even no-car household. But I might argue that even 20% is not enough. Even though all these arguments make sense, I never feel that I am saving too much for retirement.

Thanks to my mother’s medical background and her penchant for sharing stories of folks in long-term care or suffering from catastrophic illnesses, I can imagine any NUMBER of ways to go. And it’s never pretty. Or cheap. (Well, if you die instantly it’s not too expensive. But most of us don’t get to choose). With the disappearance of pensions, diminishing Social Security payments, and increasing cost of health care, I wonder if fairly soon the new rule will be “15% for basics, 20% for comfort, and 30% to escape.”

In related news, I just maxed out my 2011 Roth IRA. Which makes this the first (and last, at least for a few years) year I have contributed the maximum to my 401K and IRA. Looking back at my past retirement saving history…

In 2006, I saved…. 39%
In 2007, I saved…. 42%
In 2008, I saved…. 8%
In 2009, I saved…. 17%
In 2010, I saved…. 39%
In 2011, I saved…. 24%

I maxed out a Roth IRA in 2006 with my first “real” paycheck. Since then, my savings rate has bounced up and down – in 2008, I wasn’t able to contribute to a 401K, and in 2009, I was laid off, but retirement saving has always been a top priority of mine. Last year I saved the most money I have to date, and this year I will be able to save around $2,500 more. If you count employer contributions, CB and I are both saving around 24% of our gross salary this year. Here’s hoping that we will have the option to escape to San Diego with mai tai’s when we are retired! For 2012, I have already submitted my paperwork for open-enrollment period at work. I’ll be saving 25% of my gross salary and CB will be putting down 10%, with an additional 10% employer contribution. Then we will max out our Roth IRAs.

On a side note, I like to evaluate my savings progress based on our total, unadjusted gross income. 401Ks are pre-tax, Roth IRAs and Roth 401Ks are post-tax, SEP IRAs are pre-tax but it’s based on 1099 income, etc., so I find it much easier to just calculate everything on the gross income. Otherwise it gets a little messy when you have to adjust for tax deductions. Every country has its own retirement system, for example Australians have the chance to setup a self managed super fund (SMSF), which gives people the freedom to own & control their retirement (superannuation) investments. There are multiple financial institutions, such as AMP who will not only set you up but give advice when you please.

What percentage of your gross income are you saving for retirement? (Tell us your age, location, etc. to give some context).

Big Milestone: $100,000 in Retirement Funds

Written by WellHeeled on November 14, 2011 · 28 Comments

Crossing a milestone

You know what’s really great about getting married? Getting to calculate your combined retirement savings! When we added together our 401K and IRA balances, we saw that we have crossed the $100,000 mark with a few thousand dollars to spare. As a couple in our twenties (I am 26 and CB is 25), I think we are at a good place in terms of retirement

Saving consistently more than beating the market

I can’t say that I’ve always made the best decisions when it comes to money, either on earning or spending, but one of the things I’ve done right is to start saving for retirement with the very first real paycheck I got. CB also started saving in earnest once he got a full-time job with benefits. (I’ll take some credit in encouraging him to start a Roth IRA). He is on track to max out his Roth IRA for the 3rd year straight this year.

Our real returns are nothing to boast about. We invest in mostly index funds, with a few lower-cost mutual funds, so you can imagine that we tied our fortunes with the broader market itself. Even though I started investing at the HEIGHT of the market – late 2006, can I pick ‘em or what? – our account balances have been growing.

How? We have been consistent. As our annual household gross income increased (from $30,000 when I first graduated to ~$130,000 this year), we kept saving. When we went through bouts of part-time work and underemployment in 2008 and 2009, we kept saving. As I made money from this blog and when CB got overtime, we kept saving. We started with $4,000 in 2006, and then saved every single year after that. In 2010, including employer contributions, we had $30,000 put away. This year, we’ll be on track to save the same amount.

Most of our $100,000 is from our savings and employer contributions. Hopefully as our portfolio balances grow and time goes on compounding interest will start shouldering some of its load!

Looking forward

By the time we reach our 30s, I would like to have $150,000 or even – if we are really disciplined and lucky – $200,000 in retirement. Given that we will be in graduate school for a couple of years, I expect retirement savings will dip a little (no more 401Ks!). But I am determined to continue to at least max out our Roth IRAs even through our graduate school years.

I am grateful that we were in a position to save what we saved, and hope we can keep the momentum going.

image credit: wikipedia.org

X-Ray Your Investment Portfolio

Written by WellHeeled on September 19, 2011 · 3 Comments

What does a retirement investment portfolio and mystery meat have in common?

I’m not sure what animal products mystery meat is made of (and not sure I want to know…), and I wasn’t clear on what investments make up my retirement portfolio. When I first started investing in 2006, I had one retirement vehicle – a Roth IRA – and one fund in that vehicle – a 2050 Target Retirement Fund.

Since then, I’ve added different funds. With a 401K (stock and bond funds via American Funds), a Roth IRA (international stock index, U.S. stock index, U.S. bond fund), a Rollover IRA (international stock index and U.S. stock index), and a SEP IRA (Vanguard STAR Fund), it’s a little confusing to me what my portfolio actually composes of. Do I have enough stocks? Bonds? What is the split between my international and domestic equities? What sectors am I invested in? Who knows!

Figuring out what’s in my portfolio

Fortunately, Morningstar has an easy and free tool made for folks like me. It’s called the Instant X-Ray, which, as the name implies, “x-rays” your portfolio to show you what’s really in there. All I had to do was to input the ticker symbols of my funds and my current balance, and voila! The website spits out a set of handy graphs and charts with details on different characteristic of my funds (stock vs bond, geography, growth vs. value, etc.)

This tool would be even more helpful for folks who have portfolios of greater complexity. Say you have individual stock funds, or Treasuries, or are part of a couple with several funds between the two partners. The Instant X-Ray would help you see what you actually have in your portfolio.

investment asset allocation X Ray Your Investment Portfolio

Armed with this information, I can re-balance to my desired asset allocation. I thought I was at 80% stock / 20% bond mix, but as you can see, I am actually at 70% stock / 30% bond. Now, when I make new Roth IRA contributions, I only contribute to my stock funds. That way I can slowly bring up my equities portion until I read the 80/20 split. If I didn’t have the Instant X-Ray, I probably would have gone on dividing my contributions between stock and bonds.

On the whole, I am comfortable with my investments. Nothing too exotic, nothing wildly out of sync with the broader market (which would make sense as I invest mostly in index funds). I plan on checking my investments every 12 months or so so I can make sure they are appropriately balanced. As my portfolio grows, I plan to add in a REIT fund and a small cap fund.

Do you know what’s in your retirement portfolio? Did your findings surprise you?

Giving a Leg Up: Roth IRAs for Your Kids

Written by WellHeeled on August 10, 2011 · 18 Comments

When did you first start a Roth IRA? Now imagine if you can dial back that timeline by 5 years, or maybe even 10 years. What if your parents had the resources and the foresight to help you start a Roth IRA when you were in high school? Or, even better, in middle school? What if your parents matched your savings, dollar for dollar, thereby teaching you a valuable lesson about retirement planning and giving you a thereafter unheard-of automatic 100% return on investment?

Monday’s Wall Street Journal article encourages more folks to take this step. Daniel Wiener, a money manager, first opened an account for his son when he was a teen. Now, this son is 27, and I’d venture to guess, very grateful for the forward-thinking of his dad!

Daniel Wiener…didn’t impress either his wife or his teen son when he first opened a Roth IRA for the boy. They “looked at me like I’d just announced we were moving to Siberia,” he wrote in his Independent Adviser for Vanguard Investors newsletter. But Mr. Wiener says the move helped his son, now 27 years old, accumulate not just dollars but also an appreciation of compounding investment gains over time.

If children / teens have s earned income, they are eligible to contribute to a Roth IRA. This means that money from selling lemonade, babysitting, designing webpages for small businesses, etc., can be funneled into a Roth IRA. In fact, there is someone in the PF community who is doing just that - Don from Money Reasons saving a chunk of change every year for his children. Don’s kids are still too young to earn money, but once they do he is going to open a Roth IRA for them. For now, he is putting money away every year, earmarked for his kids’ future.

I hope this is something I will be able to do for my kid.

Photo credit: jdurham via morguefile.com

Graduates: Save for Retirement

Written by WellHeeled on May 23, 2011 · 5 Comments

Is there any topic as scintillating as that of retirement? Especially to newly minted college graduates?

I think not! Retirement seems far off, but without a plan it comes much faster and harder than one expects. It’s not too difficult to just get started… check out my new post at the LendingTree blog:

5 Tips for Recent College Grads to Plan for Retirement

After I graduated from college, I used all these tips to really get started on saving in my Roth IRA and 401K. The best thing is that if you are consistent with it, the dollars add up more quickly than you realize. I just peeked at my 401K statement – I’m 90% of the way there to my $16,500 goal.

Thanks to Sarah at Paranoid Asteroid, Jeff at Sustainable Personal Finance, and Kim at Kim’s Kitchen Sink for chiming in with their tips!

P.S. LendingTree is running a Home CFO contest on Facebook. There’s a BIG prize every month for the lucky winner named the Home CFO: LendingTree will pay for one month of your mortgage or rent. If you win, there’s $1,000+ extra for retirement savings right there.

Is Roth IRA Bad for America’s Fiscal Future?

Written by WellHeeled on April 11, 2011 · 12 Comments

Most personal finance bloggers (this one included) love the Roth IRA. Contribute to a plan with after-tax money, then watch your funds grow unencumbered by taxes. And, when you are ready to withdraw, you don’t have to pay taxes either. But what’s good for the individual might not be good for the collective whole. LA Times columnist Gerald Scorse has damning words for Roth IRA, calling it a “fiscal Frankenstein.” I never thought about it this way, but might my favorite retirement vehicle be bad for America’s fiscal health?

There’s no tax break on contributions. But from that point on, taxes simply vanish. As long as the account is at least 5 years old, there is no tax on any withdrawals made after age 59 1/2. There’s no requirement that you make a minimum withdrawal — after age 70 1/2, or ever.

All of which makes Roths a perfect “fiscal Frankenstein.” In return for little more than ordinary upfront taxes, Congress waived untold billions in future Treasury receipts. Then, too, Roths could be a drag on the U.S. economy. Since no withdrawals are required, assets can lie idle indefinitely.

For Roth holders, the accounts become a permanent, federally sanctioned tax shelter. For America, they’re a bit like toxic instruments on the nation’s books.

Scorse acknowledges that the Roth is a good deal for individuals, but that’s not enough. He concludes:

Whatever the answer for individuals, there’s little doubt that Roths are wrong for America. They’re Frankensteins, fated to wreak havoc. It’s time to retire Roth IRAs.

What do you think? Even though I think this retirement vehicle rocks, are Roth IRAs toxic for our nation’s future fiscal health?

See Yourself with Wrinkles and White Hair, Save More for Retirement

Written by WellHeeled on March 28, 2011 · 9 Comments

One reason why people – especially people in their twenties and thirties – don’t save for retirement is because our future selves are so distant. But if what you can come face to face with your Future Self? What if, you will be able to see your own face, digitally aged to 68 or 70, with wrinkles, creases, and white hair? Well, you just might be encouraged to stash more cash for retirement, so says the Wall Street Journal article on behavioral economics.

Why is it so difficult for people to set aside money for the long-term future? Low earnings and high temptations are obvious reasons. But perhaps the most basic cause is a fundamental human frailty: We view our future selves as strangers.

Estimating with any precision what you will want 30 or 40 years from now is almost impossible. You don’t know your future desires, because you don’t know your future self. What will you want or need when you are 65 or 70 or 80 or older? Who knows?

Viewed this way, it isn’t surprising that the young typically don’t want to save for their retirement, since that stage of life feels as if it will be lived by someone else. And when you save money today on behalf of your remote future self, you deprive your immediate present self of cash you could use right now.

Of course, if you spend tomorrow’s savings today, you won’t have cash when you need it in the future—but that day of reckoning is decades off. That is true for those of all ages, but the lost opportunity is greatest for young people, because money set aside at an early age has more years to grow.

Yet it is highly unusual for people to think more vividly about their future selves than about their present selves, say psychologists.

Imagine yourself as “grandma” or “grandpa”

One way I reach a connection with my Future Self is to imagine the 70-year-old me as a close loved one, a grandparent or a doted aunt, perhaps. Her welfare and comfort rests on my shoulders. Grandma’s source of income comes from Social Security and whatever I have put aside for her. Grandma can’t work, because she is old. Her health might not be up to snuff. Employers might be more reluctant to hire older workers. If I put nothing away now, grandma gets nothing extra in her retirement.

She will have to subsist on ramen and rely on library books for entertainment when she might have loved to eat sushi and visit Latin America. Even worse, what if grandma gets sick? If I don’t have funds for her, she will only have first-generation drugs with heavy side effects. She will not be able to pay for a in-home aid or a private room at the hospital. Do I want grandma to be in such sad straits? Of course not!

Grandma’s friends might plan a big trip cruise to the Mediterranean but she can’t go because she doesn’t have the money. On the cold days, she might not have enough money for heat. Or she will have to choose between heat and food, or food and medicine. Or she lies awake at night worrying about her future. How will she live? Will her house be foreclosed on?

That doesn’t sound like a fun retirement for grandma, does it?

Now we don’t not know what we will be like, exactly, when we are old. But looking at my grandparents, I know what matters: a nest egg that will provide for them in their old age and prevent them from being financial burdens to their children, family who loves and takes care of them, trips and lunches with friends, and a dignified death when the time comes.

ALL of the above is made easier with sound financial resources.

I think it’s a great idea that scientists are figuring out ways for people to save. But I don’t understand how people don’t think they will be old. Everyone grows old – or dies young. But I don’t need a sophisticated facial progression software to encourage me to save. I just imagine the plight of sad, old, grandma, who is confined to a life of bare subsistence because I didn’t make her a priority.

Does the “grandma” (or “grandpa”) trick work for you? Would you be more likely to save if you saw a digitally aged photo of yourself?

Saving for Retirement: Love It? Hate It?

Written by WellHeeled on July 18, 2010 · 21 Comments

Growing up, I never had personal finance as part of the curriculum. But everything I’ve learned about motivation to save for retirement, I’ve learned in high school.

Recently, TeacHer Finance wrote a post sharing her perspective – she hates saving for retirement. I understand her reasons.. maybe that’s why I don’t really think about them – because I am afraid of mentally discouraging myself from saving! It is difficult to balance retirement with shorter-term goals, that is for sure. And although there are good, logical reasons to save for retirement, the motivation factor, like I mentioned at the beginning of this post, was completely from high school.

From High School to Retirement Saving

This might be a nerdy way to explain it, but here is it. When I was in high school, I’d often slack off a little at the beginning of the semester – I wouldn’t study as hard as I should have, or prepare for the occasional pop quizzes that I KNOW will come up in class. It’ll be okay, I told myself, I will work harder for the next test, the next presentation, the next project.

Towards the second half or 2/3 of the semester, I’d look at my class progress reports, feel disappointed, and then I’d hunker down and put my nose to the grindstone. But the simple mathematical truth was that for every 80% I got in the first half of the class, I’d have to get a 100% to achieve the 90% ending score I wanted. Let’s just say that it was a rare day that I got those 100%s.

And every time before the final, when it’s 4 AM in the morning and I am still pouring over my notes on European history or statistics or macroeconomics, stressed out of my mind, I think, why didn’t I start preparing earlier? If I had JUST prepared a little more at the beginning of the term, I wouldn’t have to work so hard towards the end, I would give myself more wiggle room, and I would probably have gotten a better grade.

The lesson I learned? Put the work in early, get better results for less effort.

That’s the thought process I bring to retirement saving. I am saving as much as I can right now so that I wouldn’t have to panic and start saving 30% of my income when I’m in my 30s or 40s, when I will surely have more financial obligations. Now, when I think of not saving for retirement, I think of high school.

Do you love saving for retirement (is love too strong a word?) Do you hate it? How do you motivate yourself to save for something that is so abstract, and so far away?

6 Reasons Why the Roth IRA Rocks

Written by WellHeeled on July 7, 2010 · 9 Comments

Exactly 6 months after I made my first contribution, I maxed out my Roth IRA for 2010, meeting one of my new financial goals for this year. That makes 5 full years of maxing out, or $23,000 worth of contributions. Of course this $23,000 will grow to $9,490,308,898 by the time I retire, right? Right?

All jokes aside, I am glad this is done. I want to give an anonymous shout-out to my middle-school science teacher, “Mr. Rob,” who explained to me both the concept of the Roth IRA and the mechanics of opening an account online over a meal of chicken salad at Appleby’s. A more financially educational meal I’ve never had. It’s funny, the most valuable things I’ve learned from teachers, I learned them outside of the classroom. Thanks, Mr. Rob.

Qualified distributions and capital gains are tax-free

You put after-tax money into the Roth IRA, and then your money can grow tax-free. Qualified withdrawals are also tax-free. We don’t know what the federal tax rate will be in the future, but having a source of tax-free earnings can never hurt. Many people have traditional 401Ks (which are funded with pre-tax dollars and thus will be taxed when you withdraw in retirement), so having a Roth provides important tax diversification.

Available to all with earned income (i.e. not employer-sponsored)

You can start a Roth IRA as long as you have earned income. In other words, this option, unlike the 401K, is not dependent on employer sponsorship. I didn’t have a 401K for 2008 and part of 2009, but I can save via Roth IRA. If parents want to encourage their teenager to save, this is also an excellent method. A 16-year-old who earns $2,000 babysitting in a year can contribute all of that $2,000 to the Roth. For added incentive, parents might provide matching funds,(say, 50 cents for every dollar saved.)

Spousal IRAs: because nonworking parents need to save too

Stay-at-home parents (SAHP) takes care of the family, but the Roth IRA gives them a way to take care of their retirement needs too. Tax law allows a working spouse to contribute $5,000 a year (the current federal IRA limit) to an IRA in the stay-at-home parent’s name, even though the SAHP may not have earned income. If you are a SAHP, insist on having a Spousal IRA set up for you so that you have a way to access tax-advantaged savings in your name.

Penalty-free withdrawal of contributions

You can withdraw your contributions (not gains) at anytime, penalty free. Ideally, you should leave your retirement bucks to work for you as long as possible, but in a pinch, money in the Roth IRA can also double as an emergency fund or a down payment.

Variety of investment options

Think of the Roth IRA as a basket, and specific investments (stocks, mutual funds, bonds, etc.) as eggs that you put in the basket. With so many firms offering Roth IRA services, it’s easy to select one that works for you. Those who wishes to invest in low-cost index funds can choose Vanguard, Fidelity, or Charles Schwab. If you want to select your own stock, brokers include Etrade and Scottrade. Many banks and investment firms also have Roth IRA options. Your 401K might be dependent on the investment choices your employer provides, but no such limitations exist with the Roth IRA.

Catch-up provision for older workers

If you are 50 or older, you can contribute an additional $1,000 in 2010. So, a 55-year-old worker can contribute a total of $6,000 in the Roth IRA. The catch-up contributions feature is a great way to accelerate savings before the retirement years.

A version of this article first appeared in BlogHer.

The Pudding Index: Get Your Retirement Score

Written by WellHeeled on June 7, 2010 · 7 Comments

Retirement planning is as much an art as a science. One of the most common questions is: How am I doing? No one can tell you for sure, but one nifty little website tries to give you a sense of your progress compared to a predefined index. This website, the Pudding Index, tries to answer the question: when you retire, what percentage of your income will your retirement accounts provide?

The Pudding Index does so by comparing you to a Benchmark Account (represented by the score 100). The Benchmark Account for women means that you are on track to save 55% of current income by age 65. For men, it means that you are on track to save 65% of current income. If you score above a 100, it means that you are ahead of the 55% (or 65%, if you are a man) of current income. If you score below a 100, you are lagging behind the index. The Benchmark Account for women is lower because women tend to live longer – another reason we ladies need to save early and save often. The Benchmark assumes that your investments will grow at 7% a year and that you will contribute 9% of pay to retirement every year. It also adjusts for inflation in terms of pay.

The Pudding Index calculator requires four simple inputs: (1) birth date, (2) gender, (3) current income, (4) defined contribution assets (401Ks and IRAs for most people). Then the Pudding Calculator spits out a single number to show how you compare against the index.

This Index doesn’t take into account cash savings, possible Social Security benefits, government / private pensions, or other assets (such as real estate, inheritances, business interests) that can become retirement assets. It’s not a perfect measure (and one doesn’t exist), but it is a good way to check your progress against an Index based on just what you have saved in defined contributions accounts.

Most retirement experts I’ve read recommend 70% to 90% of your current income. When I input my factors, I received a score above 100. The website says that if my account’s performance were to match the Benchmark Account’s (i.e. every year I save 9% of pay and my investments grow at 7%), my retirement assets can replace about 65% of my income at 65. Given that retirement is always a moving target, I prefer to err on the side of saving too much rather than too little. I am glad to know that I’m on the right track, though.

Feel free to share your scores in the comments. Did this calculator teach you something new? Or did it confirm what you’ve already known?

image source: puddingindex.com

5 Reasons I Save for Retirement

Written by WellHeeled on May 5, 2010 · 14 Comments

We all know we should be saving for retirement… but it’s not easy to do. Life gets in the way and retirement seems so far off. I’ve managed to make retirement my biggest financial priority through a combination of positive (financial freedom!) and negative (fear of spending old age in penury) motivation.

Here are the 5 things that I tell myself to save for retirement:

1. I want to enjoy retirement free from financial worries.

I want a retirement filled with volunteer work, extensive travel, a comfortable, paid-off home, and plenty of friends and socializing (I’ll be that old lady at dim sum on a Wednesday morning). I would not enjoy my retirement if I spend my days worrying about deciding between groceries or the house payment. I would not enjoy my retirement if my sole source of income depended on Social Security.

2. I want to afford a reasonable level of medical care.

With family members who work in the medical field – and who see, every day, the consequences of being old, sick, and poor in America, I am well aware that health care costs will probably exceed anything I can imagine at this point in my life. I don’t know what the state of health care will be like in 40 years, but I do know that even with health insurance, (1) illnesses will be expensive, and (2) having more financial resources will make me more comfortable in a time of sickness.

3. If I have children, I do not want to burden them with my care.

I want my children to fret about getting me the perfect birthday present, not to worry that if they don’t send me money each month my gas will be shut off. Freedom from worry about my financial situation is one of the best gifts I can give to the next generation – it’s a gift that my parents have given me, and I would want to continue that.

4. I do not want my parents to worry about my financial well-being.

I’ve been fortunate to receive a lot of educational assistance from my parents. There’s even the possibility that they will leave a little bit of real estate to me in the future. But I never want my parents to worry about my ability to provide and save for myself after they are gone. They should enjoy their hard-earned money. If they leave me something, great. But I don’t want my parents to scrimp and save because they are afraid that my finances depend on getting an inheritance.

5. I want to leave an inheritance in event of unexpected demise.

If I die before I retire, I want to leave something to my loved ones. One of the refrains I’ve heard is that “you can’t take it with you when you go,” which is true – you can’t take anything with you when you go. But I don’t see leaving money behind as a waste. In fact, I would consider it a privilege to leave a bequest – however small – to the people whom I love and who love me.

Why do you save for retirement? Are your reasons similar to mine?

image source: www.mynmi.net

New 2010 Financial Goals

Written by WellHeeled on April 6, 2010 · 19 Comments

You know you are a personal finance blogger when the prospect of making new retirement contributions makes you so excited you can’t stop looking over the 401K plan document.

Now that I have a new job, it’s time for revised objectives for 2010. My financial goals for 2010 are simple: I want to contribute the most I can to tax-advantaged vehicles. That means I will:

1. Max out 401K ($16,500):

I reach 401K eligibility in July, so that means I will have 6 months to contribute for 2010. That will be $2,750 per month. My total net income – including freelance earnings – will cover my expenses during that time. But I won’t have much money for anything else.

2. Max out Roth IRA ($5,000):

I currently have $2,000 for 2010 – another $3,000 and I’ll be done with this goal. I’ll concentrate on Roth IRA goal in April, May, and June so it will be taken care of by the time July comes around.

If I make all these goals, at the end of 2010 I will have over $50,000 in retirement savings. These are aggressive goals for me, but I need to take advantage of every chance I have to save for when I’m a cool old lady. In addition to the purely financial goals, I also want to do something nice for my parents. This means I will:

3. Send Mom & Dad on a weekend trip ($200-$300?):

One of my favorite presents for my parents is a night or two at a high-end hotel for weekend getaways. I put them up at the Mandalay Bay in Las Vegas (Christmas 2008) and the Omni Hotel in San Diego (Summer 2009). They would never spend that kind of money on themselves, so it makes me happy to be able to do something nice for them. Mom apparently still talks about the Vegas trip to my aunt and my family. Score in the Good Daughter category.

Now that I have a job, it’s something I can resume doing. Perhaps a trip to Santa Barbara is in order. There are so many nice bed-and-breakfasts in that city… let me know if you recommend any one in particular.

image source: searchenginepeople.com

Why Saving for Retirement is My Biggest Financial Priority

Written by WellHeeled on January 21, 2010 · 20 Comments

Saving for retirement is my biggest financial priority – bar none. Now, perhaps the title is a little misleading, because saving for retirement is by no means my only financial priority, nor am I dismissive of the fact that I might never reach retirement (only the guy upstairs knows for sure, right?). But given the choice between saving for retirement in 4o1Ks and IRAs, and saving money in taxable investment accounts or cash accounts, I will almost always choose to save more for retirement.

Even though money is fungible (i.e. you can use money you’ve saved for X and spend it on Y – there’s no difference. The value of that money is still the same), the psychological impact of retirement savings and everything else is very different.

Because retirement is so far away for me, a twenty something – it’s easy and sometimes tempting to put it off. A 25-year-old may tell himself, “I can start saving when I’m 30, right now I am paying student loans.” A 35-year-old might say, “I’ll start after I’m 40, right now I have to save for a down payment.”

Every time you save for retirement, you’re making a choice to give up something now (a nicer car, a fancier apartment, a vacation to Paris) for an uncertain payoff decades down the road. That’s exactly why I stretch myself to put more in retirement. Because if I save for retirement first, the hard part would be done.

As an example, let’s say in a year I can comfortably save $10,000. I want to start saving for $40,000 down payment in 4 years. I could put the $10,000 towards the down payment, then try to scrape together some savings for the Roth IRA. Or I can put $5,000 in retirement, $5,000 in the down payment, then try really hard to save another $5,000 for the down payment.

If I really want a house, it would be much easier to forgo meals out and cute clothes if I see that the payoff is an extra $5,000 in a down payment. I might be able to push myself and save $15,000 instead. That payoff is more immediate than a retirement 40 years away. On the other hand, if I save for the down payment first, I might not be motivated enough to put another $5,000 in retirement funds. Saving for retirement is my biggest financial priority, because it’s always difficult to make immediate sacrifices for a far-off reward. But it must be done.

image source: i.village.com

First Roth IRA Contribution of 2010 – Even Small Steps Are Worth Celebrating

Written by WellHeeled on January 7, 2010 · 15 Comments

I expect to have some freelance earnings this month. So, I’ve decided to put $250 into 2010 Roth IRA. It feels good to be still contributing to retirement – albeit a much reduced amount - even when I’m laid off. It’s a small (but still significant!) step towards the $5,000 2010 Roth IRA limit.

There are thousands of articles out there on why you have a Roth IRA (and I have written extensively on my love of the Roth) – all I can say is, it really does become a habit. Now one of the best things about a new year is the fact that I can contribute more to my Roth IRA.

It’s easy to start and fund a Roth IRA and begin saving for your future. In fact, you can do it with as low as $50 a month. That’s less than $2 a day. You can do it. Every little bit you can save counts.

In 2009, I maxed out the Roth IRA on the first day of the year. I knew this year was going to be different, but that doesn’t mean I shouldn’t make the effort. It might take me 20 small steps $250 to get to $5,000. But that’s okay. Even small steps are worth celebrating, because those small steps are going to get you to where you need to go.

Personal Finance Is Sexy

Written by WellHeeled on October 1, 2009 · 13 Comments

Recently CB opened a Roth IRA. Never doubt that personal finance knowledge is very attractive. (I wonder if my money nerdism has rubbed off on him).

I am so proud of him for taking this step.

So next time you are trying to interject some romance into your relationship, why not give your partner a card and say, “honey, I started saving for retirement!” Oh, the personal finance sparks will fly!

$17,500 Roth contributions = $12,800 current value

Written by WellHeeled on January 10, 2009 · 6 Comments

Goal #1 of 2009 is right on schedule. I am on track to max out the Roth IRA by the end of next week with $500 fom the upcoming paycheck. Currently, my contribution stands at $4,500, partially thanks a small bonus I received at work.

Maxing out the Roth every year is probably one of my proudest financial achievements. Since I’ve started a Roth IRA, I’ve contributed $17,500. $4,000 in 2006 and 2007, $5,000 in 2008, and $4,500 (soon to be $5,000) in 2009.

But is the current value of the Roth IRA anywhere near that figure? Noooooo. Nope. Not a chance in hell. My Roth is worth about 70% of what I put in. That’s all money I saved, dollar by dollar. So, OUCH.

At least the shares are cheap right now.

2009 Goals v1.0 (or this economy is making it hard to define goals!)

Written by WellHeeled on December 10, 2008 · 16 Comments

It’s that time of the year again, when pf bloggers set out SMART financial goals and then resolutely check them off one by one as the year goes by.

I have an idea of what I’d like to accomplish, but they all mostly depend on this economy of ours, which is to say that it’s fairly difficult to come up with good, solid goals when the future is so unpredictable.

But here, assuming all goes well (i.e. I stay healthy and gainfully employed at around my current salary), I have six (relatively?) simple goals for 2009:

1. Max out Roth IRA: $5,000 – this will mark the fourth year of maximum contribution. Going to do this in January/February.
2. Contribute to 401(k): $5,000 – 2009 limits have been raised to $16,500, but there’s pretty much no way I can max out my 401(k). If I can get to $5,000, I’ll be very happy.
3. Retake the GMAT – my first score was serviceable but not ideal. I want to do better. This means hitting the books harder and smarter than I did before.
4. Apply to 6-7 graduate schools – this will involve lots of school visits and applications. I am hoping that I can take all the application fees out of regular paychecks, and not my Freedom Fund.
5. Run a 5K race – I’m so out of shape that if there is an organized run that’s less than 5K, I’d do that one instead. Are there 1K runs?
6. Go on a trip with CB – This would be so fun if we can make it happen. I’d like to do a weeklong vacation.

As you can see, my saving / investing goals aren’t that ambitious next year. I feel a little hesitant stating that “I will save $20,000+” when everything is so up in the air. Goals #3, #4 , and #5 depend less on the job situation.

Someone I know was recently laid off. From a Big Four accounting firm. When the accountants start cutting, you know we are in trouble.

Is anyone else finding it difficult to define goals in such uncertain times?

Do you even check your account balances any more?

Written by WellHeeled on October 7, 2008 · 12 Comments

I try not to.

Even though I’m following the markets pretty closely thanks to NPR and WSJ (and The Daily Show), I try not to let all the headlines of “Markets Plummet!” or “The Next Depression?” or “Stocks Plunge With No End in Sight!” unnerve me (too much).

I do know that my account balances are down around 15%-16%. Not a huge change in absolute dollars, but certainly in percentage terms. Come January 2009, though, I’ll be back in the market with the first installment of Roth IRA contributions. Can’t say I don’t have faith!

Since the financial crisis started over a year ago, I’ve developed a cursory understanding of various financial instruments from reading all the news. Below are just some of the terms I’ve learned, thanks to the impeding global recession:

Commercial paper (very short-term debt that businesses issue to fund their day-to-day operations)
Credit swaps (a type of derivative where two cash streams are exchanged, designed to reduce risk – oh, the irony).
CFOs (collateralized fund obligations, or securities backed by hedge funds and fund of funds)
CMO squared (collateralized mortgage obligations backed by more CMOs)
Credit crisis (the phenomena of frozen liquidity, spreading insolvency, and panicked selling before the End of Days)

The more I know, the more I know that I still only know about 1% of 1% of what I really need to know to understand all this, but even the experts don’t seem to be that in control… so, I guess I should be worried!

My obsession with following every detail of the crisis (those enabling media outlets!) doesn’t do one thing for my portfolio performance, and I’m not changing any positions because I’m not touching my retirement money for a long time. But, following all the drum beat of bad news is kind of like watching a burning building, in slow motion. It’s such a disaster that it’s difficult NOT to stop and watch. Right when the firefighters (with a $700 billion water hose) seem to have the garage contained, the roof bursts into flames.

Given the way things are going, who knows where the market will be in three months. But, perhaps we are near capitulation, or is that wishful thinking?

Readers, care to take a guess on where the Dow Jones will be come January 2009?

Do I have a 10,000? 9,000? 7,000?