Cold Feet - Investing for Retirement

[NajdorfDefense]

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You would be still restricted by the IRS max which for 2007 is $15,500 for employee pre-tex contributions (since you are under 50).

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I believe this is for pre-tax contributions only, you can put in up to like $42k, iirc?

[Jeff W]

I think you're getting ahead of yourself--start by developing a budget. Start with the 6-month budget if you have to since their is uncertainty about housing costs after that.

[f97tosc]

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Most of the investment advice I can find on Vanguard, here, etc, is geared towards retirement. Which is all well and good, but at the rate of things I've been investigating, I'm going to end up with 6 months emergency funding in a money market fund, and then it seems like everything i DONT spend will be going into a Roth IRA! Unless I am overestimating how much of a chunk is going to be taken out of the 4k/month, obviously thats more money than i ever had inflow in my life but don't living expenses, car, rent, taxes etc take away a hugggge amount of that?

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One benefit with the Roth IRA is that you can take out the contributions at any time. This means that the Roth IRA can double as retirement saving and emergency fund. If you end up needing some emergency money, simply take it out (the contribution, at least), if not, well, then you will be glad you didn't have the money in a regular account.

[mattnxtc]

I have always been under the impression that there are penalties for withdrawing from your Roth IRA early unless its for buying a first house and some other exceptions

[f97tosc]

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I have always been under the impression that there are penalties for withdrawing from your Roth IRA early unless its for buying a first house and some other exceptions

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As I understand it, these penalties only apply to the earnings. So if you put in 10k, and it grows to 12k, you can take out the 10k without any restrictions whatsoever; there will be penalties if you try to take out the last 2k (with certain exceptions, as you mention).

Says Wikipedia: "At any time, the IRA owner may withdraw up to the total of his contributions (in nominal dollars)... Withdrawals of more than the total of contributions + seasoned conversions are considered withdrawals of earnings, and are subject to tax and penalty if they are not qualified"

Although arguably Wikipedia isn't the most reliable of sources. Anyone please correct me if this is wrong!!

[mattnxtc]

O ok...well i guess thats an option...but really that 10k that you withdraw in x years early of retirement is worth less than it did when you put it in.

If you felt like you were goign to need that money before retirement then I wouldnt do a Roth IRA but something like a mutual fund.

[theTourne]

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Compounding w/o tax consequences each year is very powerful.

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This is a bit of a hijack, but I hear this comment a lot and I don't understand it.

Assuming I will be in the same tax bracket at the time I withdraw the money as at the time I contribute it (this is obviously not always the case, but frequently I will be in a higher tax bracket when I contribute), it seems that the total withdrawl value will be the same, regardless of when the money is taxed. Here's an example.

1. I put $100 into a savings account pre-tax. It grows at 8% for 20 years, and then I withdraw it and pay 25% income tax.

My total withdrawl = (100 * 1.08^20) * .75 = $349.57

2. I make $100 and pay 25% income tax. I put the remaining money in a savings account making 8% for 20 years, and withdraw it tax free.

withdrawl = (100 * .75) * 1.08^20 = $349.57

Obviously I have simply regrouped the terms on the left side of the equation. Can someone tell me what, if anything, I'm missing about the "magic of compound interest?"

Thanks.

[f97tosc]

Yes, I guess the trade-off is that if you put the money in the Roth IRA, then the earnings are tax free but you can't take them out until retirement; if you put it in a regular fund then you can do what you like with the earnings but you have to tax them.

[TLC]

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Can someone tell me what, if anything, I'm missing about the "magic of compound interest?"

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You're not accounting for paying taxes each year on the portion of your 8% which is subject to taxation (i.e., capital gains, dividends).

So, if that resulted in an average after-tax return of 7% per year in your taxable account, it would grow to ~$290 in the 20 years.

[bav]

Start out putting LOTS into the 401K and into a Roth in addition (Roth does have some additional flexibility as folks have already mentioned--which can be a bad thing if you are the type who can't resist spending money you have simply because you have it). You will then develop spending habits and a budget that fits within your takehome paycheck. Do the opposite, and start out without much in the 401K and you may find yourself spending everything you earn simply because it's there. Depends on your personality.

No matter what, if they have 401K matching, contribute enough to max that out. Otherwise you're just giving up free money. So if they match up to the first 6%, put in AT LEAST 6%.