New Things: Put A Significant Amount of Money Into A Roth IRA

Every year on my birthday, I make a list of new things I want to try.  Some of them are exciting, some are difficult, some are shockingly mundane.  You can read about past adventures here.  Also, this post is NOT sponsored by Fidelity Investments in any way.  I just had a really good experience with them.

Like a lot of people, I’m intimidated by things like Investing and Money Market Accounts and Having A Diversified Stock Portfolio.  My money management technique goes something like this: spend less money than I earn, don’t buy things I don’t need.  And this has served me very well!It also means that apparently I have the same money management strategy as Liz Lemon.Because I’ve spent most of my adult life either:
a) in other countries
b) working at well-intentioned, but underfunded non-profits with no benefits package to speak of
I have virtually no retirement savings.  Like, I have enough to pay a several months’ worth of rent.  Which is a bit worrying.

So this year, I set about making things right.  Or at least very, very slowly start putting away money for my retirement.

If you don’t know, here’s the deal with retirement funds:

401k
A retirement fund that’s part of your benefits package at your job.  Both you and (hopefully) your employer contribute to this fund – they’re not legally required to contribute but most do. If you don’t contribute anything, neither will your employer.  Since I’m self-employed, this obviously wasn’t an option for me.

Roth IRA
An individual retirement fund; not tied to any employer.  You can put up $5,000 into your Roth IRA each year, either in one giant chunk or in small payments throughout the year.  You don’t pay taxes on the money in your account when you eventually take it out and use it.  Contributions to your Roth IRA are not tax deductible.

Traditional IRA
Is similar to a Roth IRA but your contributions can (usually) be deducted from your taxes.  But with traditional IRAs you do pay taxes on that money when you withdraw it.

I chose to open a Roth IRA.  If you’re feeling clever and brave, you can do the same (all by yourself!) at Fidelity.com but I wanted to talk to A Real Live Human and have things explained to me using pie metaphors and hand gestures.  I wanted to write a real check, with a pen, and hand it to someone.

So I did!  My super lovely Financial Adviser Katie, asked me all sorts of questions about how aggressively I wanted to invest (not particularly), how many working years I had left (about 30) and how involved I wanted to be in my portfolio (uh, not.)

“I want to write a check once a year and not think about it again,” I said.

So she hooked me up with a Target Date Fund which is a fund that considers an investor’s age and earning years.  When you’re young, it’ll put a higher percentage of your money into of (relatively) risky stocks and as you get closer to retirement it will automatically put more of your money into safer bonds.  You don’t have to switch anything around or constantly worry about it!  Awesome.

I’m still not an investment guru by any stretch of the imagination, but it feels good not to be entirely clueless.  While I was writing this post, I asked my uncle (who worked in business and finance for ages) to give it a once over.  He had this sage advice:

“It all gets very complicated, but in the end the most important thing (especially if you are under 35) is to save for retirement, and save lots
because the old folks are going to spend all of the
Social Security money.  There are lots of places to get good advice or
bad advice on saving on the internet; just use common sense as you would
planning a trip or deciding for whom to vote.”

Do you have investments?  How are you planning for retirement?  And exactly how overwhelmed are you by talk of portfolios and percentages?

25 Comments

Cassie @ WittyTitleHere.com

Ugh. It annoys and discomforts me just thinking about it. I work part-time, and my paycheck is a painful reminder of that. When we had a company meeting to discuss benefits, 401K plans, etc. I wanted to laugh. Like, I'm probably the lowest-paid employee here. You want me to invest? Bahhh. I know I should and will eventually. It's nice knowing you really do have the option of writing a check once a year and then completely forget about it. That's my style, too.

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margosita

I don't have investments, but I've been thinking about it a bit recently. I have employer-matched mandatory retirement savings, as a state employee, but am curious about additional options.

Curious but not knowledgable in the least!

I'd be interested in hearing how you chose a Financial Adviser. I'd like one, I think, even though I know I'd feel embarrassed about how much money I don't make, going to one.

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Sarah Von Bargen

Margo!

Here's what I did:

1) Talked to me uncle (the one with all the finance experience) who recommended I invest with Fidelity.

2) Called and made an appointment at the nearest Fidelity office.

That's it! Soooo, that's probably way, way too little effort on my part. Maybe I just got lucky and got an adviser I liked! But I'm pretty sure that any good money management company would:

1) Pair you with a young female adviser – which I know doesn't technically matter – but I was much more comfortable talking with another woman my age.

2) Ask you a ton of questions about your income, life plans, personality to help find the right investment plan.

Just FYI, I worked with Katie at the Oakdale Fidelity branch if you just want to straight up call that office and make an appointment with her 🙂

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iris

I was talking to my dad about this, and he basically said that you shouldn't be putting money into retirement until you've put a down payment on a house (assuming you have a goal of buying a house). Basically, that cash you're saving…you might need it for the giant investment of a house.

…but I'm pretty sure this is all a personal choice thing.

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Sarah Von Bargen

Yeah, I think it's definitely a personal choice thing. Every.single.person I know who owns a house is underwater on their mortgage and wishes they hadn't bought one.

But, of course, most of those people bought at the top of the real estate bubble, so it's different for everyone 🙂

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Rachel

I actually count my mortgage payments towards retirement savings (in my head) because…if i keep paying off mtg mortgage while im young, ill be able to live rent-free when im older. i know real life isn't that straightforward but it helps me priorities. also, i earn a teen tiny wage right now so im not saving much at all. this attitude stops me worrying quite so much about it all…

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EMackk

I absolutely think you can BOTH save for retirement AND save for a house – you just have to think of each thing as a different timed goal. A house is much more short term (sure it might take years to make up a down-payment but you're buying one before you're 64 and retired) – retirement is well, for when you're 64 and retired (if you're lucky). I saved a big chunk of change up to go out on my own (I'm now self employed) all while putting away for retirement – and I'm a librarian – we're not paid squat.

I put in 5% of my checks into retirement – I'm lucky and my work matches that with 10%. Last year I got a wee cost of living raise, so I decided to add 1% to my contribution – which made me feel quite adult, I'm putting in MORE than the required 5%! (yes, my job requires after 2 years that you contribute 5%).

I now support myself working full time on my own biz, but kept ties with my old job (very part time) in order to keep my IRA with them (it's in education so we don't have 401K's) and because I wasn't sure how I'd go about investing myself – I just told them to do the "I'm in my 20's so invest for me how you will" set of investments and don't know what all the numbers mean when I get statements – but I know I have thousands saved so far, so it's reassuring.

Seeing this post, I know that if I do cut ties with my old employer, I CAN go it alone! Thanks!

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EMackk

Wanted to add – if you have it put away, even a wee amount if you can't afford much – automatically – you never see it, therefore you don't count it as part of your budget. For me it's just like I get paid 5% less than I really do.

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Lauren

Wow! Great post which makes me feel like I'm not behind everyone.

I'm 23 and have been maxing out my IRA for 3 years. I always thought everyone was so ahead of me in this department. I'm glad there are other people out there who don't find it as important (although, personally, I find it very important).

TD Ameritrade is what I use and I was able to set up my account right away. It's fun that I'm young and doing this because I don't have to worry so much about it. Young'ns are supposed to risk a lot since they have little!

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Cate

Thanks for answering how you found a financial advisor. I need to go see one this year to hash out this stuff, and have NO idea how to find one.

Also, do you have to contribute to a Roth every year? Or can you skip years, if say, you want to travel abroad or start up a business??

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Jenny

I have a retirement plan that was offered to me by my employer. I understand basically 2% of what it is, what happens to it and what it means for me. When I enrolled, I tried so very hard to understand what it all meant…and failed. I get regular statements am find them utterly complex. I realize that being this honest about my lack of knowledge is perhaps not a great idea, but in all my conversations with friends and family members about retirement savings, I haven't gotten then impression that your average person knows too much about the details either. My employer contribute whether I do or not, so until I get a better grasp of the situation, I'm not contributing my own money at all.

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The Divine Miss Em

I've actually worked in finance my entire adult life, so I found this post especially interesting. I sort of fell into it in 2008 when my dad (who is an advisor) needed an assistant in a pinch. I started contributing to a 401k around that time. I got fired in 2010 & that money saved my butt. I'm 27 now & rebuilding the account that I drained.

As for the retirement savings vs. saving for a down payment on a house, it definitely is a personal decision. In my experience, though, I would prioritize saving for retirement. I run into way too many people who are in their 50's or 60's with barely enough to cover expenses for a year. There are a lot of handy retirement calculators online that will help you figure out how much you should be saving per paycheck or per year. One of my goal is home ownership & I just started saving toward a down payment. I'm lucky that I'm in a position where it's not a financial strain to be contributing to both my 401k & a house fund. Houses will always be up for sale & it doesn't matter how old you are when you buy. But the older you are when you start contributing to your retirement is a HUGE handicap.

That's just my 2 cents as both an employed 20-something & someone who has worked in the industry.

P.S. I LOVE target date funds. That's what I'm currently invested in. I'll worry about it in 30 years. 😀

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Anonymous

Ok, I didn't read ALL of the comments, but here's my 99 cents and maybe someone else said this already…

-I have a traditional IRA. I pretty much was able to determine how much of a refund I got from the Feds by how much $ I put into it. It comes straight off your income for taxes (So if you put 2k in, and made 50k, you only pay taxes on 48k. If you put in 5k, you pay taxes on 45k) However, the $ HAS TO COME FROM WAGES. It cannot be from … I don't know, an inheritance or something. So pretty much, the Feds are paying me to invest in my retirement.

-My IRAs are in CDs. This money plus some interest is GUARANTEED. That's what I want to hear if I'm putting away a few thousand dollars. Not some risky fund because I'm young … ! May work for some people, but honestly, I'm not looking to lose a cent.

-You can skip years for depositing, to answer someones question. There is a max every year though, and if you go OVER the max, you are penalized. You also have until April 15 of each year to contribute to the PREVIOUS tax year. (April 15, 2012 was the date to deposit by for 2011 taxes)

-Here's a major thing: You are able to deduct up to $10k (or $20k, I forget) for first-time home buyers. Soooo whoever said to buy a house first…? $10k isn't a lot, but at least you are able to touch it/use some for it. You can also deduct without penalty for medical expenses, etc if you qualify.

I took a tax class earlier this year, and BOY is it AWESOME to know/understand them. I used the Retirement Contribution Credit for my mom's taxes and saved her $500. Seriously, if Death and Taxes are the two things for certain in life, isn't it wise to understand them? It's amazing how little people know I've come to find out.

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Eileen

Hey Sarah, you can so open a 401k as a self-employed individual! Here's Fidelity's info page. If you call their 800# they'll be able to tell you way more about it.

That said, the Roth is always, always a good plan. And it's really not scary–you essentially just put in your money and let it sit there. Good for you for starting your retirement savings! And everybody else–you can do it!

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Erin

Wow, it's so difficult in the US! In Australia, your employer has to put 9% of the value of your salary into a superannuation fund (basically, a retirement fund). These are managed on your behalf (though you can choose different levels of risk, etc) unless you opt to set up your own fund. If you put in extra savings in your super account, the government will put in a co-contribution so as to create an incentive to save for retirement. Basically, the more money you put in, the less of a burden you'll become on the health care and pension systems. With an ageing population, that's really important.

I've even had money put into my super account for some freelance gigs, though generally freelancers have to pay themselves.

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Young Werther

Investing is excellent, start when you're young.. but why do they make it sound like some terrorist group (IRA?)

Hope you don't mind me pimping something I wrote a while ago for college/ school leavers 🙂 Here

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Bettina

Hi Sarah,

I'm curious if you were always paid in the US even when you traveled and freelanced a lot?

I live in Europe, and I'd love to contribute to my Roth IRA, but I don't have any earned income in the US.

Please share your tips!

Thanks,
Bettina

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Rae

Wooo this was popular! And how! And to be honest lady, I have been working up the nerve to ask you about this very subject. You know I'm a fan and I'm trying to get out of 9-5 grind, but my first step in the direction has been to try to get out debt and then to set up a retirement account. And I love reading your blog, reading Location 180, The Art of Nonconformity, etc., but no one ever talks about retirement! I've been devouring books: Smart Women Finish Rich; Rich Woman: Because I Hate Being Told What to Do, Pay It Down!; Rich Dad, Poor Dad. Also I got a financial plan (with a financial expert!) from LearnVest because unlike you (and Liz Lemon), I do NOT always spend less than I earn. Also I worked overseas for so long that I had not a penny invested toward that until very, very recently. I still want to know how everyone else is doing it, because as inspired as I am to work hard to have more independence in the near future, I am hoping that I can look forward to some lazy days near the end. Thanks for this! Keep it up!

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Allison

About a year ago, I realized that we had saved up enough for a down payment on our condo in a year, and although we were paying off our student loans aggressively, it might be a good idea to start saving for retirement- because compound interest is your friend!

We keep a separate emergency fund, but with a Roth IRA, you can withdraw your contributions without penalty (just not your earnings)…so if something really horrible happened, we could take out whatever we put in (assuming, of course, that we hadn't lost a large portion of it due to the market).

We went with target date funds from Vanguard, and I was happy that we were able to max both of our accounts out last year 🙂

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Lauren

I already commented but I wanted to add that Suze Orman can be a life saver. Sometimes she's a little too conservative, but I've learned tons from her. She definitely prefers you saving for retirement over buying a house and paying off your student loans. Student loans aren't bad debt. I'm maxing out my IRA and always on time with my student loan payments because I know they're both important for my future!

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Anonymous

a few months ago, my mom and i each opened a roth ira. she's turning 50 in a few months, and i'm 25. we contributed the maximum amount towards each account and it felt GREAT.

both of my employers have their own retirement programs. the one that i'm contributing to currently is actually an automatic, required by state law retirement fund. they set up the account after you've been with the company for a year (i've actually been with them on and off for several years as a temp, but for the last 18 months i've been solidly employed with them). i technically am a state employee, so it's a state retirement plan, which is kinda cool, but i would have rather used that 5% of my paycheck towards the roth ira. my other employer offers some type of retirement savings program, but since i've just been hired, i'm not sure yet of all the different benefits they're offering.

it's weird for me to think that i have retirement savings at 25. i still have probably 40-50 working years ahead of me (lets face it, almost no one retires at 65 anymore). if i max out my roth ira contributions every year (which isn't likely to happen for a few years), i could potentially contribute a quarter million dollars to it! my grandma was a very financially savvy woman. her savviness allowed her to retire in her 50s and live more than comfortably for the next 20+ years. i'm definitely trying to emulate her, haha.

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Anonymous

Hey young'ns (any of you in your 20s or 30s): Take it from an older person, and start putting money into one of these things NOW, especially if your employer matches and it and even if you don't know that much about it. You can easily find charts online that will prove this, but you will earn SO MUCH MORE if you start now versus waiting until you are in your 40s or later. Believe me, you're not going to "understand" it that much more by then, but you WILL have wasted time and literally hundreds of thousands of dollars! When I see those charts I cringe, because I didn't start early enough (for the same reasons you are all citing now).

There are some really good and easy-to-read books out there (one by Manisha Thakor or any by Jean Chatzky) and a site called LearnVest that's geared toward explaining things simply but honestly! with the Internet you have no excuse not to learn about this on your own and know enough that you need to have a retirement savings account. Start it now, and learn about it and adjust it later, if you have to. BUT START IT NOW!

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