Should We Even Have Our Retirement Accounts?
Posted on October 09, 2006 by Him and tagged retirement, roth ira
If you've looked at any of our net worth statements, you've seen that we have four retirement accounts between the two of us. Only two of these accounts, the employee sponsored ones, are actively being funded right now. If you don't want to read my long-winded analysis of our accounts, scroll to the bottom to see where this is all going. Here's a breakdown and a little history of our accounts.
His Roth IRA
My mother caught wind of the Suze Orman show sometime when I was in college. She dug up some resources and really didn't understand them, but the seed was planted. The notion was too good to be true - that putting $2,000 (the contribution limit at the time) into a Roth IRA for a few years, then letting it grow so that by the time I retired I'd have a million bucks. My parents opened up a Roth IRA account for me with Fidelity and fully funded it for my 19th birthday. For my 20th and 21st birthdays, they also funded it. It was my job to figure out how to invest so that I would retire comfortably. I've had some good luck with my investments so far, but I'll be looking to change my investment strategy soon (more on that in a later post). Since the initial contributions by my parents, no other contributions have been made.
His SIMPLE IRA
A SIMPLE IRA (Savings Incentive Match Plan for Employees of Small Employers) is a retirement plan for small employees where pre-tax dollars are put into a retirement account. These work pretty much just like 401(k)'s, (of which there is a SIMPLE 401(k) variant - here's a comparison between the two) except for a few differences. Unlike traditional 401(k)'s there is no vesting schedule that can be applied; employers have to match employee contributions up to 3%, but no more, unlike the 401(k) maximum of 25%; and you cannot "loan" yourself money to be paid back from a SIMPLE IRA. Because of our current financial situation, I only contribute 3% - enough to get the maximum employee match, for a total of the equivalent of 6% of my salary.
His HSA
I don't really consider this a retirement account. Here was my overview of this account a few months ago.
Her Roth IRA
When my mother was telling me about Roth IRA's, I also put the bug in Her ear that she had to open one as well. And that she did - with student loan money. She's had some success with her investments as well, but trouble with the company that she held it with. Like me, she opened this account before either of us knew what the hell we were doing. Since the account was initially funded, no more money has been actively contributed to the account.
Her 401(k)
Read all about 401(k) plans here. I won't bore you with my amateurish description of one. Her contributes 6% of her salary, of which her employer matches 40%, for a total equivalent to 8.4% of her salary.
So why have I spent the time to explain all of this? Well, Nancy had a great question:
"Why are you putting money into our retirement accounts while you have...debt?"
That's a great question that I answered to in the post: Free money.
That got me thinking though - is this the most prudent financial decision? I've already reduced my retirement contributions to free up some cash for debt repayment.
Should people with as much debt as us contribute anything to their retirement accounts?
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triple-e | Oct 9, 2006
Looking at the changes in net worth for the month, you are making good payments on your debt. Are you working on a larger emergency fund instead of getting that debt paid off? Depending on the job situation (I haven't had a chance to read deep into the archives), I would think that 10K is plenty for most emergencies, especially with 13K in debt hanging out there. Fund the retirement to the match, but no more, and get that debt gone! I constantly wish I had been more aggressive with my 401k and less aggressive with my car buying!
Sarah | Oct 9, 2006
Always pay yourself first, and up to the employer match at a minimum. (I won't get in to a long-winded explanation about how wonderful compounding interest is)
I think you have your priorities straight, contribute up to the match, then pay off the credit cards, then the student loans. You also have a wedding to plan for, so I'm sure that takes some (a lot) of your extra cash.
My financial advisor recommended to me to have a goal of 10% of my income go into my 401k (start out at company match, then work up as I am able to) because he knows that at age 27 it just isn't possible for me to put in $15k a year... maybe once your cc's are paid off, you can each increase contributions to retirement by a percentage, then revisit every 6 months until you are up to 10%. The -1% difference in your paycheck is minimal.
The bottom line though, NEVER turn down free money.
Blacklid | Oct 9, 2006
The "financial advisor" we hired has been good for next to nothing so far (meaning I could have learned more reading another Orman book), but he has whispered one grain of truth: you will always be in debt. The odds are too high, even if you have the Ultimate Self-Control, that you will end up needing SOMETHING that you cannot pay for with savings alone. If you wait until you're completely out of debt, how long is that? I wouldn't bet my retirement on a moving target. And you get free money. Absolutely, keep saving, especially in the accounts that are matched!
Tata | Oct 9, 2006
The retirement funds would be fine if you weren't still paying far more into your wedding fund than you are putting against your debt. You will still be in debt two decades from now at this rate, which is going to be a far great impediment to your retirement plans than anything else.
squidly | Oct 9, 2006
I second this - continue to fund your retirement plans. When you get older and wealthier, you may find the yearly contribution limits in your tax-advantaged and tax-free accounts too restrictive, and you'll wish you had more money to allocate within them. Having to deal with taxable accounts is a pain.
I would leave no more than 3-6 months' expenses in your savings account, and put the rest toward your debt. Even $3000 would make a big dent in them!
I will not trouble you with a windy monologue on the tradeoffs between debt reduction and contemporaneously contributing to a retirement plan. You seem to be on track with this dilemma by contributing the minimum amount to retirement plans for earning the employer match (free additional money) while applying the balance of free cash flow toward the retirement of costly debt balances.
What I would like to point out is the little known fact that a SIMPLE IRA planholder has a great deal of control over who manages the nest egg. I will provide you with my blog post on my personal situation as a SIMPLE IRA contributor.
Simple IRA Transfers
Hope this will prove helpful to you somewhere down the road.
Wealthy Geek | Oct 10, 2006
I definitely agree with the consensus. Waiting until you're debt free to start saving for retirement will cost you untold thousands in compound interest. Plus, until you actually reach that age where you're staring down the barrel of retirement, you'll *always* think of an excuse not to save for it. Save now and be done with it.
Major | Oct 11, 2006
Couple of thoughts presented earlier that really need repeating.....
1) You will always be in debt
2) Contribute for the match - free money!
3) Pay yourself first
A coworker once told me that she and her husband were waiting until they were out of debt to have children. She is retiring soon. And still no children - they had never gotten to where they thought they could afford a child. Consider your retirement just like child - you have to feed and nurture it for it to grow to fruition. Otherwise you may be debt free, but feel like you may never have enough money to retire.
You should absolutely put money in up to the maximum employer match. Roth IRAs are also cool in that you can withdraw the contributions tax and penalty free later on. And up to $10000 in earnings can be withdrawn tax free after 5 years to put towards the first time purchase of a house. So a Roth can be a good idea...
IMO these big banks/brokerages are idiotic to drive away small customers as small customers could one day become big customers. But they do need to ration the service they provide. But I can tell you that Citibank gives high net worth customers (between $1 and 2 million account) very erratic service too. That doesn't make sense to me. There are few people with $5million plus or whatever they deem is enough money.
TSC | Oct 9, 2006
Yes, if I were you, I would still have retirement accounts, and would fund them in the following order:
* SIMPLE to the employer match
* 401(k) to the employer match
* Roths
* SIMPLE/401(k) to the limit
Time in the market is what really matters. If you give up contributing until you're out of debt entirely, you're giving up on several years of compounding interest. This may not seem like a big deal now, but when you're in your 60s, the difference could be tens of thousands of dollars.
Maybe you've seen that graphic that shows how each dollar you invest in your 20s is worth X times as much as a dollar invested in your 30s or 40s?
Your debt is consolidated at low interest rates, right? Looking at your net worth statement, I would actually use the money sitting in your savings account to pay down the debt, or tap it for your Roths.
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