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I have been maxing out my ROTH IRA since 2006 and the majority of my retirement is in that. I do have about $7k in a 401k, but I feel pretty comfortable with my retirement. According to my calculations, if I keep maxing out my ROTH IRA until I’m 65, I’ll have close to 2.6 million, in just that 1 account.
The reason why I haven’t been putting more into a 401k, is because I can’t touch that money until much later, and my thought with the taxable accounts, such as the mutual funds I have now, is that I can use that money in 5 – 10 years down the road once I’m ready to buy. Hopefully I could be close to buying a property back in the Midwest, for cash.
I have roughly $2k/month to invest. Right now, I’m putting $1500 into mutual funds and $500 into my Roth IRA. Should I be putting more in my 401k, instead?
I would say stop putting the money into the mutual funds immediately and switch it all to the 401k.
Why? Even if interest rates climb back up to 8% in 5-10 years housing will still be historically average cost for financing.
You're also forgetting that having a mortgage and paying it off will increase your credit score and make it easier to get better deals on financing in the future as your risk will be low, and you could potentially buy a second property and rent it out.
You're also forgetting that you have ~40 years to retirement. Compounding returns are your friend and you should definitely max out the 401k first, then max out the roth, then do the taxable accounts.
Even if you don't max out the 401k, does your employer have matching? If so, you're leaving money on the table. At the very least contribute to the match. For example, my employer matches 75 cents on the dollar for the first 8% of my salary. Thus, if I take out 8% of my salary, then that means they throw an additional 6% on top of that. If I didn't make full use of that, I'd be kicking myself later.
Your logic is pretty full of holes ... commendable to try to buy with cash so young, but in reality most people buy property with cash when they've already owned for many years and they use the proceeds to pay off a house in a cheaper market. Since you're from CA, if you buy in CA and sell in 10 years most likely you will be able to buy a house with a sizeable downpayment if you move to the midwest. Most people who buy houses with cash are in their 50s.
Don't rob your future retirement compounding returns for the belief that "debt is bad." Not all debt is bad so long as you pay it off, and can work in your favor down the road, for example, when you have kids and need to take out student loans.
At the very least, match the company's 401k contribution, don't leave money on the table.
I would say stop putting the money into the mutual funds immediately and switch it all to the 401k.
Why? Even if interest rates climb back up to 8% in 5-10 years housing will still be historically average cost for financing.
You're also forgetting that having a mortgage and paying it off will increase your credit score and make it easier to get better deals on financing in the future as your risk will be low, and you could potentially buy a second property and rent it out.
You're also forgetting that you have ~40 years to retirement. Compounding returns are your friend and you should definitely max out the 401k first, then max out the roth, then do the taxable accounts.
Even if you don't max out the 401k, does your employer have matching? If so, you're leaving money on the table. At the very least contribute to the match. For example, my employer matches 75 cents on the dollar for the first 8% of my salary. Thus, if I take out 8% of my salary, then that means they throw an additional 6% on top of that. If I didn't make full use of that, I'd be kicking myself later.
Your logic is pretty full of holes ... commendable to try to buy with cash so young, but in reality most people buy property with cash when they've already owned for many years and they use the proceeds to pay off a house in a cheaper market. Since you're from CA, if you buy in CA and sell in 10 years most likely you will be able to buy a house with a sizeable downpayment if you move to the midwest. Most people who buy houses with cash are in their 50s.
Don't rob your future retirement compounding returns for the belief that "debt is bad." Not all debt is bad so long as you pay it off, and can work in your favor down the road, for example, when you have kids and need to take out student loans.
At the very least, match the company's 401k contribution, don't leave money on the table.
I’m really not too worried about my credit score or interest rates. I’m not really comfortable leveraging myself with mortgages and debt to increase a credit score or to buy a bunch of property that I’m not ready for.
Yes, I run the numbers on compounding returns, and it does look pretty sweet. However, I’m getting similar returns in my mutual funds and they are much more liquid that a 401k fund.
I am 5 months away from receiving an employer match of 4%. Trust me, once that kicks in, I’ll be contributing back to the 401k at least 4% to get the match. There is no way I’m leaving free money on the table.
How is saving up and buying a house in cash is a plan full of holes…? I’m 29 and could put down $90k for a down payment right now. If I run my numbers correctly, I should have close to $300k by the time I’m 35 for a house. That’s more than enough to pay for a house in cash in the Midwest. In addition to a paid for house, I’ll be maxing out my Roth IRA and would have somewhere around $125k in retirement and a fully funded emergency fund.
Am I really not putting enough emphasis on retirement?
No, you're fine. Contribute up to the match on the 401k and put the rest into taxable.
Most people will just say do taxable last. It's not always so simple. Taxable has favorable rates and rules that can be heavily exploited. The fact you can defer capital gains until sale for example is an enormous advantage.
I personally have almost 90% of my net worth in individual stocks, in taxable accounts. That was no accident.
I’m really not too worried about my credit score or interest rates. I’m not really comfortable leveraging myself with mortgages and debt to increase a credit score or to buy a bunch of property that I’m not ready for.
Yes, I run the numbers on compounding returns, and it does look pretty sweet. However, I’m getting similar returns in my mutual funds and they are much more liquid that a 401k fund.
I am 5 months away from receiving an employer match of 4%. Trust me, once that kicks in, I’ll be contributing back to the 401k at least 4% to get the match. There is no way I’m leaving free money on the table.
How is saving up and buying a house in cash is a plan full of holes…? I’m 29 and could put down $90k for a down payment right now. If I run my numbers correctly, I should have close to $300k by the time I’m 35 for a house. That’s more than enough to pay for a house in cash in the Midwest. In addition to a paid for house, I’ll be maxing out my Roth IRA and would have somewhere around $125k in retirement and a fully funded emergency fund.
Am I really not putting enough emphasis on retirement?
You are almost 30 today. Depending on your genetics and lifestyle, many advisors are telling our generation to save enough so we live until 95 just to be safe. I know for me, personally, my grandparents all lived into their 90s, and I am watching what I eat and exercising, so I will likely get there too barring accidents.
Think about it - if you retire at 60, that's 35 years of retirement, inflation, and property taxes you have to save up for. I simulated every market scenario between 1875 and 2012 and made absolutely sure that even if another Depression happened 15 years after I retired I would still have enough money to maintain my lifestyle until I and my wife were 6 feet under.
And I dunno about you, but when I retire, I wand to live it up a little at first then settle down and do a side trade or hobby while earning money doing it.
When I was 30, I had one year's salary saved up in my 401k. Did you? If not, you need to catch up.
Another way I look at it is, if you think taxes have only one way to go - up - then keeping money in taxable accounts make no sense because you're taxed twice - income + SS taxes, then when you withdraw the money on cap. gains.
Keeping it in a Roth will allow tax-free investment growth. Keeping it in your 401k defers all taxes and reduces your taxes today.
But to each their own. Just note that depending on your future lifestyle, you may be mortgaging your future retirement for the "high road of no debt."
I think consumer debt = bad definitely. Get rid of that as soon as possible (car, credit card, other high rate loans etc). But house debt isn't necessarily bad. And if you have a significant down payment you can save oodles of interest by going to a 20 or 15 year loan. Rates in 5 years or so will likely be going up, but won't go above 8%. They don't want to kill the housing market because it accounts for a (too large) portion of our GDP, even if it risks another housing bubble.
Do yourself a favor and check out this guy's website: google "retire by 40" and you get an idea of how it can be done without having to resort to no-debt.
You should really be putting money in your 401k. having house debt, is not bad debt. Good you are contributing to ROTH IRA, but the goal is to fully max out 401k ($17.5K) and ROTH IRA. Afterwards, you save for your cash house or down payment or do taxable account investing with a brokerage. But make be sure to max out all tax advantage accounts first.
Don't try to over think this. Just do it. Its makes all the sense. Investing should be simple.
1. Emergency fund
2. max company match at 401k
3. max ROTH IRA
4. fully max out 401K to 17.5k
5. save for house down payment. or cash house or whatever you want to do.
But make sure 1 thru 4 is done. And stay away from debt, beside mortgage.
Make it simple. You do all steps 2 thru 4 for the next 30 years and allocate it correctly and stick with it and re-balance, you will retire well.
I'm not sure if some of you are reading my posts correctly. I do max out my Roth IRA every year. I don't have a company 401k match. Yes, I have a years salary saved up in my Roth account.
I'm not sure if some of you are reading my posts correctly. I do max out my Roth IRA every year. I don't have a company 401k match. Yes, I have a years salary saved up in my Roth account.
Our point is you should max the 401k first. Meaning $17,500 (for this year).
Our point is you should max the 401k first. Meaning $17,500 (for this year).
Why would I want to do that instead of invest in my Roth IRA first, that grows tax free. I don't have a match. And, even if I did, why would I want to prioritize tax deferred money instead of tax free money. I'd rather pay the taxes now, than in 35 years.
Why would I want to do that instead of invest in my Roth IRA first, that grows tax free. I don't have a match. And, even if I did, why would I want to prioritize tax deferred money instead of tax free money. I'd rather pay the taxes now, than in 35 years.
You can do both, max Roth IRA and 401K.
This depends on your fund options in 401K. Do you have index funds in your 401k?
Contributing to a 401k beyond the employer match is really unnecessary.
The benefits of tax-deferred accounts are greatly exaggerated. The withdrawals taxed as ordinary income and RMD rules kill much of the deferral benefits.
Stay taxable and keep buying funds/stocks in those accounts. You will do very well with time.
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