Cold Feet - Investing for Retirement

[IdealFugacity]

As the various topics of my posts have indicated, I'm in 3 months I will be starting my post-college job. After crunching some numbers last night, after taking out 8% pretax for 401k, and then 7.65% Social Security/Medicare from the post-401k value, I'm looking at around 4 grand a month BEFORE taking anything else out (income taxes, health benefits, disability, insurance, etc.)

Note that the overall salary will increase approx 4 grand every 6 months 4 times, leaving around a 5 grand / month value in place of the 4k/month listed above, again before deducting anything else.

I'm 22. I'll be in an apartment, who the heck knows how good it will be (free for first 6 months, on my own in a different state for at least 2 years after that unless one of the 6 month rotations brings me back to original location). I'll have car payments, insurance, etc..you all know how life is [img]/images/graemlins/tongue.gif[/img]

How do I determine how what % of my savings should be going into other retirement accounts (Roth) and how much I should be putting into accounts more geared towards purchasing a home, etc? To get the full employer match, I'll already be socking away 8% of my salary a year automatically (+4% match). I could make a couple hundred extra a month if I did not contribute to 401k for the first 6 months (pre-match) but this reeks of a bad idea to me.

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?

[Sand]

At 22 and making 50k a year put away 10% in your 401k, diversify appropriately (but very aggressively at 22) and you should have retirement easy.

Or do 8% in the 401k (never ever pass up on the match from your employer) and another 2% or so in a Roth.

You have time on your side. 22 is early to start - a wonderful thing. Just put 10% away in some fashion.

[mattnxtc]

what kind of job do you have that makes over 50k a year with 4k raises every 4 months?

FWIW go and check out CNN's money section for some great articles on starting to save for retirement young.

I just graduated in Decemeber so I have some experience dealing with what your dealing.

I would suggest setting up your 401k immediately and just start depositing from the start. It will lower ur taxed income which is always a plus. It also allows you to get into the habit of not having that money so that you dont miss it when your company starts its price matching.

Roth is good for any excess money you want to save and will allow what the guy on CNN calls tax diversification. Of course you do get penalized for removing it early so dont put money in there if you expect to need it. (unless your going to put it towards a house)

I would wait on the roth though until after you get going in your job and take on all the expenses that you will have to deal with...This allows you to look at what money you actually have left after all yoru expenses so that you can budget for yourself what you expect to need each month and what you can move to other places.

Personally my "plan" has been to put more than the necessary minimum into my 401k (13 percent when 8 gets the company match) b/c you want to get as much money as possible into your 401k. So that would be my suggestion to you. Any "extra" money you feel you have should just be added to your 401k...allowing that money to sit in there for 40-50 years is goign to grow into a huge amount for you.

As for savings I budget myself this way:
I "reload" my wells fargo account every 2 weeks when i get paid to $1,000 and I move any money over that (generally 500-700 dollars) into an online savings account that gives right at 5% interest on it. This allows me to have enough money to last me through 2 weeks including enough to cover emergencies, while having the bulk of my salary in a savings account that is pretty liquid and getting a high interest rate.

[TLC]

If you want to get a better handle on your net paycheck, check out http://www.paycheckcity.com/netpayca...calculator.asp

[IdealFugacity]

[ QUOTE ]
what kind of job do you have that makes over 50k a year with 4k raises every 4 months?


[/ QUOTE ]

It's every 6 months, and it's part of the rotational program. So i leave the program after 2 yrs making somewhere 12-16 more than i was at entry. the 4k is not guaranteed, it could be as low as 2500-3000, but for the last several years its been 4.

[IdealFugacity]

A 'good dilemma' i have is that I can contribute up to 50% of salary to 401k... This will make it hard for me to *ever* max out the 401k.

[TLC]

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).

[IdealFugacity]

But would I really *want* to put that much in before putting any in taxable investment accounts that I would use to buy a house? Or should I just rely on savings accounts for any pre-retirement purchases, and not invest at all? (This seems *WRONG*)

[mattnxtc]

With the amount of money you appear ur going to be making...i think only having 8% in ur 401k is doing a disservice to yourself especially if u feel youll have an overabundance of cash on hand

[TLC]

Personally, I now make every effort possible to max my annual contributions to tax-deferred accounts. I didn't when I was younger (like you) and now regret it. Compounding w/o tax consequences each year is very powerful.

Of course, you shouldn't do so if it creates hardship or financial ruin. But, I would definitely recommend that you sacrafice a little by forgoing getting that extra nice car, going on an extravagent vacation, or eating out a lot so that you could afford to put away the max allowed in tax-deferred accounts.

Yes, you should have emergency funds which represent 3 to 6 months of expenses. Hopefully, you can find a way to do both. I keep mine (and monies that I need within a year or two) in an ultra short bond fund...but a high-yielding savings account (i.e., with an Internet bank) would suffice.