What Age Did You Put $ in a Retirement Acct?

[kyphysics]

(Mods, feel free to move this thread to a more appropriate place.)

I've been learning (the basic) of investing and one question I have is about when to start - in particular, when to put money into a retirement account?

If you've got debt (student loans) and minimal income (I work part-time, while attending school), is it pointless to do at this point? When DO you start putting money in? After you're debt free? When you've got significant income to pay for your basic needs + savings (assuming you already have an emergency fund)?

What factors go into it? Is there a particular age that is optimal, along with those factors? TIA for the thoughts.

[p.s. In general, I know the earlier the better, b/c you let compound interest take over. But besides that generic rule of thumb, what else goes into it?]
[p.p.s. Also, how big of an emergency fund do you think is best?...Sorry guys, I know these are like separate questions, but still kind of related. Feel free to move this into some existing thread if it makes better sense.]

 

[dkotschessaa]

Usually the advice you get is to put as much money as you can towards paying off debt before investing. But it's always nice to put SOMETHING away, even if it's some small percentage. There's one big exception: matching. If the company you work for offers matching, then you're getting "free money" and so might want to consider really upping that contribution.

I've heard the "emergency fund" should be 3 to 6 months. But I'm certainly not there yet, and I'm 40. Those articles that say "Put 10% of your paycheck away until you have 3 months savings" tend to illicit hostile feelings from me to the person writing the article. If it were that simple I probably wouldn't be reading the article to begin with.

 

[russ_watters]

I'm not sure there is general agreement on this question because a fair amount has to do with human psychology, not math (we've had that discussion recently). Some people recommend starting early if for no other reason than behavior pattern setting, even if mathematically it leads to a lower return than paying off your debts first. You can also have a dual-purpose retirement account and rainy-day fund.

I prefer going with the math and choosing to do what is best rather than having to condition myself to via less than optimal choices. It's like the old golf adage about aiming to correct for your slice: never aim for the woods otherwise you risk punishing yourself for a straight drive!

There's also a flip-side to the issue of going along with vs opposing your nature: If your nature is to be weak-willed and you work-around it with other sub-optimal choices, you are training yourself to continue to be weak-willed. Conversely, deciding to act like you are strong-willed is itself a strong-willed choice that may help train you to make more strong-willed choices. Yes, there is risk in this philosophy, but as someone who's more often than not chosen to play it safe, I can say I regret more not doing or going after what I really want.

So the general guidance I would give is that you should pay of debts with interest rates above your projected investment return before you invest. In other words, if you plan to invest all your money in the S&P 500, which averages about 12% growth per year before inflation, then do pay off your 29% credit cards before investing but don't pay off your 5% mortgage or 3% car loan. Oh, and if your company offers 401K matching, the match rate is equivalent to an instant increase. Unless you are heavily into high-interest credit cards and don't expect to pay them off soon, you should take advantage of it.

As a result of this guidance, combined with the desire to own a house, I started-off rather late. In my mid-20s I had some credit card debt from buying furniture for my first apartment and otherwise being overanxious to get out of my parents' house. I payed that off before investing anything. In my late 20s I had no debt and I invested not for retirement but to save for a down-payment on a house. So I sold what I held to buy the house at age 30, then went into a some credit card debt to furnish and telescope it.

It took about 5 years to get out of the credit card debt from that, so I really started saving in earnest at around age 35, though I did have some ramp-up of the savings as the credit card debt ramped-down.

In hindsight, my choices weren't optimal in part due to difficulty projecting the housing market and also, freedom:

-If I had lived with my parents and extra 6 months I could have avoided early credit card debt, which would have put me in a much better position for the long term. That's just a life choice. (Similarly: when to buy a new car/what car, etc.)

-Due to the housing boom's late stage when I was starting out, if I had opted to stretch extra-hard for a zero down payment, crappy starter condo instead of saving for a house, I could have made money by selling it and used that money for the down-payment on my house. A buddy of mine upgraded twice in 5 years and made a profit on each. But I had no way of knowing how long the housing boom would continue and there is less risk in an apartment/rent than in buying a house.

 

[gleem]

Save when it is feasible for you to reasonably do it. Justify your spending and don't spend crazily. If or when you marry you will have additional constraints and make sure you discuss this with you fiance prior to your final commitment (money is a very big issue in marriage). Set a goal i.e. determine a reasonable income that you can retire on. Make a plan to achieve that goal. Always keep it in mind. Review it regularly. Adjust it for changing situations including your own and the general economy. Take advantage of any programs that will enhance the attainment of your goal. You have about 40 years to carry out this plan.

 

[Vanadium 50]

Those articles that say "Put 10% of your paycheck away until you have 3 months savings" tend to illicit hostile feelings from me to the person writing the article.

I think you mean "elicit", unless your feelings are unfair.

So why do you think this? Is it because you don't have 10% to spare? If that's the case, maybe the feelings are unfair - I think the case can be made that if you don't have 10% margin on your budget for savings, you probably are spending 10% more than you should: i.e. your standard of living is higher than is supported by your income. While that might be unfortunate, it's hardly the fault of the writer.

I think it's vital having savings. Things happen. Your roof might cave in. You might break your leg and be off work. Your brother may need to be bailed out of a Turkish prison. You need to plan for emergencies. If you have set your standard of living so high that you can not afford an emergency, when - not if, when - that emergency comes, in addition to everything else you are worrying about you will also have a financial emergency.

 

[dkotschessaa]

I think you mean "elicit", unless your feelings are unfair.

So why do you think this? Is it because you don't have 10% to spare? If that's the case, maybe the feelings are unfair - I think the case can be made that if you don't have 10% margin on your budget for savings, you probably are spending 10% more than you should: i.e. your standard of living is higher than is supported by your income. While that might be unfortunate, it's hardly the fault of the writer.

I think it's vital having savings. Things happen. Your roof might cave in. You might break your leg and be off work. Your brother may need to be bailed out of a Turkish prison. You need to plan for emergencies. If you have set your standard of living so high that you can not afford an emergency, when - not if, when - that emergency comes, in addition to everything else you are worrying about you will also have a financial emergency.

It's not that it's the writers fault. Although I do think the advice is somewhat tone deaf. It's written for people who can already pay basic bills if they buy a few less Lattes. We already had the emergency you speak of. My wife can't work as she has to take care of our son who was born 4 months prematurely. We already had to cash out both 401ks. All electronics pawned. One car repossessed. We are just catching up on the mortgage after applying for a home modification. If I have have an extra 10%, it belongs to somebody I owe money to, not me, so I don't really have it.

You can't budget what you don't have. So, you can imagine when i see an article that just tells me to budget, I kind of want to tell them to stuff it. It's not them, it's me.

-Dave K

p.s. oh and yes, thank you for the spelling correction.

 

[phyzguy]

(Mods, feel free to move this thread to a more appropriate place.)

I've been learning (the basic) of investing and one question I have is about when to start - in particular, when to put money into a retirement account?

If you've got debt (student loans) and minimal income (I work part-time, while attending school), is it pointless to do at this point? When DO you start putting money in? After you're debt free? When you've got significant income to pay for your basic needs + savings (assuming you already have an emergency fund)?

What factors go into it? Is there a particular age that is optimal, along with those factors? TIA for the thoughts.

[p.s. In general, I know the earlier the better, b/c you let compound interest take over. But besides that generic rule of thumb, what else goes into it?]
[p.p.s. Also, how big of an emergency fund do you think is best?...Sorry guys, I know these are like separate questions, but still kind of related. Feel free to move this into some existing thread if it makes better sense.]

The earlier the better. Putting away a small amount of money earlier and letting it grow through compound interest prevents you from having to put away a lot when you are older. To answer your question, I started putting money away into retirement accounts in my 20's. Since (in the US) IRAs or 401Ks grow tax free, it's amazing how large a small contribution in your 20s can be when you are in your 60s. I wouldn't even wait until you have paid off your student loans, but I admit that I didn't have student loans to pay when I started working full time.

 

[Vanadium 50]

It's not that it's the writers fault. Although I do think the advice is somewhat tone deaf. It's written for people who can already pay basic bills if they buy a few less Lattes.

Maybe, maybe not. But it's certainly not written for people who are in the midst of an emergency, and I would describe your present circumstances as being in the midst of an emergency. I would say that most people who are in the midst of an emergency aren't worried about saving for this or that goal, nor should they be. They are - or should be - focused on getting out of that emergency.

For people who are not in the middle of an emergency, I think the advice is good, because following it helps weather the inevitable emergency.

 

[jtbell]

I didn't start to save "officially" for retirement until I was 30, when I started my first teaching job after grad school and became eligible for a tax-deferred 403(b) plan (the equivalent of a 401(k) plan, but for non-profit institutions like schools, colleges and churches). I had saved about $5K in today's dollars, from my grad-student stipend, but I thought of that as a "cash cushion," not as long-term savings.

If I hadn't gone to grad school but instead started a "real job" earlier, I would have started my retirement savings then.

Fortunately I had no debt. Back in those days it was easier for parents to pay for undergraduate tuition, at least for only one kid, and I supported myself through grad school with assistantships. I kept costs down by always sharing an apartment, and not owning a car until about a year before I finished my PhD. And that car was a hand-me-down VW Beetle from my parents, so I didn't have to buy it. I didn't get married until I was settled in a long-term faculty position. My wife also had a stable teaching job comparable to mine, with her own retirement plan, so I didn't have to save for two people's retirement.

I started out contributing about 10% of gross salary to my 403(b) plan (including employer contributions), then increased it in stages until it was over 35% during the last few years of full-time teaching.

 

[kyphysics]

Thanks for the great discussion and feedback so far everyone. I'll re: you guys individually when I have the time.

Just a super quick follow-up: Is there any reason to not ever put everything into a Roth retirement account? Why would anyone go with a non-Roth?

 

[Vanadium 50]

Why would anyone go with a non-Roth?

1. Tax issues
2. Eligibility

 

[JaydenMartin28]

In high school business class we were taught about how compounding works. Our teacher showed us the math of how you could start with very little money when you were 18 or put in huge sums after you were 35 to get to the same amount at age 65. I was sold and started putting away little bits for retirement as I could right after high school.

 

[Greg Bernhardt]

I think not till I was 28. Way too late!

 

[jim hardy]

The earlier the better. Putting away a small amount of money earlier and letting it grow through compound interest prevents you from having to put away a lot when you are older. To answer your question, I started putting money away into retirement accounts in my 20's. Since (in the US) IRAs or 401Ks grow tax free, it's amazing how large a small contribution in your 20s can be when you are in your 60s. I wouldn't even wait until you have paid off your student loans, but I admit that I didn't have student loans to pay when I started working full time.

I second every bit of that. Especially since so many companies are ditching their pension plans.

I started saving within a couple months of starting my first job in 1969, buying company stock through payroll deduction. When 401's came along a few years later i signed up for 6% , maximum the company would match. After not very many years the stock dividends were contributing more than i was. The stock was a dog and I'm not rich but we have enough ..

The payroll deduction doesn't require any discipline so is the way to go.
If you can avoid the "New Car Trap" you will be able to live better - car payments are a huge robber of wealth . Drive secondhand cars and eat steak.

Social Security is a pittance.
"Delay Gratification" and save .
You'll be glad you did, grasshopper.

old jim

 

[OCR]

Now Jim !... that picture tends to elicit, illicit hostile feelings in me...!

And, I'll have you know... I've cleaned up my act ! .

"Most of the my humour is more miss than hit, though there are moments that elicit a chuckle."

Humour is the British spelling of humor, also...

 

[russ_watters]

Didn't see this before...

Just a super quick follow-up: Is there any reason to not ever put everything into a Roth retirement account? Why would anyone go with a non-Roth?

Well, "everything" is not an option since there is a limit of I think $5,500 a year, which isn't a lot to be saving for retirement. However, I recently had a debate with several people including the CFO of my company who argued that a traditional IRAis better. After some research, it turns out that it depends on your income level and expected retirement income.

For current high earners who tend to take out less when retired, they will be putting money in at a higher tax rate with and taking it out at a lower tax rate. So it may make sense to do a traditional IRA.

I don't think there is a clear answer to the question though, nor do I even think the rules of the game are static. I don't think any government-sponsored investment vehicle (401K, IRA, college savings funds, etc) is safe from the coming collapse of Social Security. I think odds are pretty good that when it comes, the government is going to start siezing those funds, making much of this discussion moot.

 

[russ_watters]

And since I'm going backwards:

I think it's vital having savings. Things happen. Your roof might cave in. You might break your leg and be off work. Your brother may need to be bailed out of a Turkish prison. You need to plan for emergencies. If you have set your standard of living so high that you can not afford an emergency, when - not if, when - that emergency comes, in addition to everything else you are worrying about you will also have a financial emergency.

It's worth pointing out that there are different levels of what one would call an "emergency". The first bar commonly cited is a $500 "unexpected expense" (a blown water heater, for example would be $300-$1000) and Americans' preparedness for such an event is downright pathetic, with more than half saying they would have to go into debt to handle such an expense.
https://www.cbsnews.com/news/most-americans-cant-afford-a-500-emergency-expense/

That's truly pathetic, as it is less than one *week's* income at the national median.

I had a couple of years of a cut-hours issue going into the last recession, soon after buying my house so I know how much financial issues can gnaw at you on a daily/constant basis. It's a rough way to live. But I also know people for whom their every six months car insurance payment or every 2 years set of new tires is a "surprise" expense that they can't handle, even though it shouldn't be.

Two months salary at the national median is about $6,000 (take-home). That covers most "moderate" emergencies, up to and including a significant but not disastrous medical emergency (knee surgery, but not cancer).

As I've said before, I don't believe in keeping "emergency" money in my checking account. Real minor emergencies can be expected to happen every few years, but that means having that money sitting in a checking account earning no interest for years at a time until needed. Having it invested in a way that can be accessed in a matter of weeks puts it in range of bill due dates and credit card cycles. An emergency that comes up *today* (say, a sudden need to buy a $2000 plane ticket), I'd put on a credit card and pay back before the next cycle. I usually have that much available in my checking account (not already earmarked in my budget), but I wouldn't even bother looking.

edit: and a bit on living within your means:

So why do you think this? Is it because you don't have 10% to spare? If that's the case, maybe the feelings are unfair - I think the case can be made that if you don't have 10%margin on your budget for savings, youprobably are spending 10% more than youshould: i.e. your standard of living is higher than is supported by your income.

Living within your means is difficult for most people because people always want more "stuff" and have expectations for what type of standard of living they "deserve". But for the 98% of us who aren't in the 1% or aren't in the midst of a serious emergency, living within your means is almost entirely a choice. Consider this: if you are struggling just to make ends meet at your current income, there is someone making 10% less than you who is also struggling to make ends meet at their income and 10% lower standard of living. So all you have to do to achieve a 10% savings rate is adopt their standard of living.

 

[donpacino]

Is there any reason to not ever put everything into a Roth retirement account? Why would anyone go with a non-Roth?

A non Roth will lower your taxable income

 

[russ_watters]

A non Roth will lower your taxable income

That's true, but it is only half a thought. The Roth and Traditional IRAs are opposites of each other:
-Roth funds are taxed before they are contributed and not taxed after being taken out.
-Traditional funds are not taxed before they are contributed but are taxed when taken out.

Another piece of logic I heard regarding the benefit of the Roth is it effectively allows you to save more of your gross income due to the tax structure. E.G., if your marginal tax rate is 30% and the contribution limit for both plans is $5500, the Roth actually let you contribute $7857 to the program ($5500 to the fund and $2357 via taxes). If it's all savings anyway, the "Traditional" people take that extra $2357 in gross income, pay the 30% tax on it and then invest it in personal accounts...where it is then taxed on the way out.

 

[donpacino]

Good Point!

I'm currently going through the rollover process now. I started contributing at 22 (26 now). My first employer out of school matched percentage, but olny contributed to a traditional IRA. All of my contributions went to a ROTH account, so at the moment my funds percentage wise are 50-50.

The part of 401k investments that always baffles me is which funds to invest in.

 

[russ_watters]

The part of 401k investments that always baffles me is which funds to invest in.

I've seen compelling research that suggests managed stock funds are almost criminally bad, so you should pretty much never put your high yield/long term money in anything but an index fund.

 

[Greg Bernhardt]

I've seen compelling research that suggests managed stock funds are almost criminally bad, so you should pretty much never put your high yield/long term money in anything but an index fund.

Since our last talk I've shifted most of my position into VOO. Slow but stable historically.

 

[jtbell]

The Roth and Traditional IRAs are opposites of each other:
-Roth funds are taxed before they are contributed and not taxed after being taken out.
-Traditional funds are not taxed before they are contributed but are taxed when taken out.

Therefore, if your tax rates at contribution time and at withdrawal time are the same, a given amount of pre-tax money at contribution time yields the same amount of after-tax money at withdrawal time with both types of IRA. The only difference is when you pay the taxes.

If your tax rate is lower in retirement than than during accumulation (contributions), you come out ahead with the traditional IRA / 401k / 403b. For many people that is indeed the case.

However, if you save a lot in a traditional IRA / 401k / 403b, a nasty effect kicks in at age 70. At that age, you have to start taking out a certain minimum amount every year, and pay tax on it. These are called Required Minimum Distributions (RMDs). To get the RMD amount at age 70, divide the account balance at the beginning of the year by 27.4; in succeeding years the divisor decreases, usually by about 1.0 every year.

My wife and I are also both delaying collecting Social Security benefits until age 70, so as to increase the monthly amount. After we have both SS and RMDs, our taxable income will be about as much as when we were both still working full-time, and we'll be in the same tax bracket as back then (not taking into account likely changes in tax law by then). So I should have started my Roth IRA earlier, to get more money into it instead of the 403b. Oh well, I'd rather have that problem ("too much" money in tax-deferred accounts) than not have enough saved up for retirement.

 

[jim hardy]

Is not the benefit of a Roth that if you make a killing in a Roth the gains are tax-free ?

 

[jtbell]

Sure. However, if you start with the same amount of pre-tax money, you can put more in the traditional IRA; you have to pay taxes on it before you put it in a Roth. If you invest the same way in both accounts, in proportion to the amounts invested, your gains (in dollars) are bigger inside the traditional IRA because you started with more money. If the tax rate is the same when you take the money out of the traditional IRA as it was when you put the (smaller) sum into the Roth, you come out even.

[added]

Now, if you make a real killing, and your eventual withdrawals are big enough to push you into a higher tax bracket, then you would have been better off using a Roth. But that fits the general statement that you're better off with a Roth if you're in a higher tax bracket during retirement.

[and now back to the baseball game...]

 

[Greg Bernhardt]

Is not the benefit of a Roth that if you make a killing in a Roth the gains are tax-free ?

Here are some important rules
http://www.schwab.com/public/schwab.../understanding_iras/roth_ira/withdrawal_rules

 

[Noisy Rhysling]

When I was 19 I started depositing body parts and life expectancy into my retirement plan. To my great amazement I survived long enough to cash in on that.

 

[jtbell]

The part of 401k investments that always baffles me is which funds to invest in.

If I were starting out now in a 401k plan that has a large menu of choices, I would first pick out the funds that have the lowest expense ratio (fees extracted by the fund managers), hopefully no higher than 0.4% or 0.5%. If you're lucky there may be index funds from e.g. Vanguard or Fidelity that have ERs in the 0.1% ballpark or even lower. I've seen people post fund menus with choices that have ERs of 1.0% or even higher, which is ridiculous in this day and age.

Then from that low-cost subset, pick at most three funds that include (1) a broad US stock fund (e.g. S&P 500 index or total stock market index), (2) a similar international stock fund if you want to include international, and (3) an intermediate-term bond fund or total bond market fund if you want bonds for stability. If you're young, (1) alone is OK and (2) is optional for more diversification. As you get closer to retirement (40s maybe), gradually add (3). I wouldn't mess with "sector" funds that specialize in particular industries or other "slices" of the stock market. I don't think there's any way to tell reliably which one(s) will do better in the future, so I prefer to have a bit of everything.

When I started contributing to my 403b plan (managed by TIAA, which is common for college and university retirement plans) back in the mid 1980s, I had exactly two choices: (1) the TIAA Traditional account, a stable-value fund, mostly bond-based, which is guaranteed to have a minimum return of about 3%, and has always given me more than that, and (2) the CREF Stock account which is basically a broadly-based stock mutual fund which behaves a lot like an index fund even though it's actively managed, and has a 70/30 domestic/international split.

At that time we were coming off a long period of stagnation in the stock market from the late 1960s through the early 1980s, and interest rates were high, so even though I was only 30, I chose to split my contributions 50/50 between Trad and Stock, and hope that stocks would start to go up consistently.

Later my college's TIAA plan added more options including a US index fund, a bond market fund and a real-estate fund, but I was lazy and stuck with my 50/50 Trad/Stock mix. It's worked fine for me. A few years ago I read with amusement that Ben Bernanke, the former Federal Reserve Board chairman, had the very same mix at TIAA when he was a professor at Princeton.

 

[Vanadium 50]

I don't think any government-sponsored investment vehicle (401K, IRA, college savings funds, etc) is safe from the coming collapse of Social Security. I think odds are pretty good that when it comes, the government is going to start siezing those funds, making much of this discussion moot.

Why just government-sponsored? There are already calls for a wealth tax.

 

[Vanadium 50]

Is not the benefit of a Roth that if you make a killing in a Roth the gains are tax-free ?

Well, if your retirement plans involve "making a killing" I would say that you should rethink those plans.

Here's how it works - suppose you are in a 25% bracket and you have $1000 to invest. In a traditional IRA, you invest the $1000, it grows to $10,000, and then you pay $2500 of taxes on it, for a net gain of 6500. In a Roth, you pay taxes on the $1000, invest $750, it grows to $7500, and then you pay no taxes on it. Again, the net gain is $6500. It doesn't matter which kind of IRA you use.

The difference comes about when looking at the tax rate. If you are in a low bracket now but will be in a high bracket in the future, a traditional IRA works best. If it's the reverse, a Roth works best.

 

[russ_watters]

Why just government-sponsored? There are already calls for a wealth tax.

Agreed, but it is easier to alter an existing tax - even easier to eliminate an exception - than to create a brand new one.

So my fear for both types of IRAs is that the government will simply eliminate the exemptions from the income tax. For the Roth that will mean essentially a double-dip: the government gets income tax on the way in and way out (which would destroy the vehicle, so then they might as well just cancel it).

For traditional and 401k, the government could say, you know what, it was a mistake for us to not collect tax on them, so we're going to correct that with a one-time collection of those taxes.

Similarly, people are calling for elimination of the concept of "capital gains" being different from "income".

 

[russ_watters]

Well, if your retirement plans involve "making a killing" I would say that you should rethink those plans.

Here's how it works - suppose you are in a 25% bracket and you have $1000 to invest. In a traditional IRA, you invest the $1000, it grows to $10,000, and then you pay $2500 of taxes on it, for a net gain of 6500. In a Roth, you pay taxes on the $1000, invest $750, it grows to $7500, and then you pay no taxes on it. Again, the net gain is $6500. It doesn't matter which kind of IRA you use.

The difference comes about when looking at the tax rate. If you are in a low bracket now but will be in a high bracket in the future, a traditional IRA works best. If it's the reverse, a Roth works best.

Right, so where it also gets squirrley is if you contribute up to the limit. Essentially it means you can contribute more *pre-tax* money into the Roth than the Traditional: $5,500 post-tax into the Roth is $7333 pre-tax.

Of course, if you contribute to the limit in a Traditional and have $1833 left, you can invest that in your 401K...unless you also already have that maxed-out as well. There is a real, but small benefit of about 6% in maxing out a Roth vs maxing-out a Traditional and investing the rest post-tax plus later capital gains (in a scenario I ran similar to yours).

 

[jim hardy]

Well, if your retirement plans involve "making a killing" I would say that you should rethink those plans.

It's all a gamble. I opened a little $2000 Roth for speculation, played with Redhat and turned it into $5000.
My traditional IRA was ultra conservative . Utility stock.

They said i should diversify - sure wish i hadn't !

 

[Vanadium 50]

hey said i should diversify - sure wish i hadn't !

Why? Because you picked one winning stock?

There is a real, but small benefit of about 6% in maxing out a Roth vs maxing-out a Traditional and investing the rest post-tax plus later capital gains

And that's where things get complicated. For example, my 403(B) is ultra conservative - so much so that I get periodic nastygrams from the company. It's 42% stock, 48% bonds and 9% real estate. That looks crazy - it's conservative even for people who are a few years into their retirement. But what they don't know is that I have other, non-403(b) retirement accounts, and those are stock-heavy. The reason for that is taxes - these don't grow tax-free, but they do grow at the capital gains rate.

 

[jim hardy]

Why? Because you picked one winning stock?

Yeah but look where i got out...