Investing...FOR THE FUTURE!

[RoJoHen]

Okay, so, from what I understand of our situation here in Amurrica, when I retire, I am going to be living on the street begging for scraps because all the social security that I'm paying right now will be buried in the ground with all the super old people that died while I was just finally finishing off paying my college loans. Awesome.

So...what can you tell me about IRAs?!

 

[Hermiod]

I can tell you that, as a Brit, they really should have thought that acronym through a bit further.

 

[RoJoHen]

I have no idea what that means.

 

[Rocketman]

• I know that you basically have the choice between paying income taxes on your retirement now, and paying income taxes on your
  retirement later. Which one you want depends on what you expect your future income to be, and what you expect the future tax rate to be.
• Investing for the future involves risk as well as rewards. Be wary of any advisor or online calculator which doesn't show you the odds. So-called 'Monte carlo' calculators (such as this one, haven't tried it myself) have their faults, but generally, they do show the risk aspects.
• If your employer matches your contributions, that's like an instant 100% return in the first year of whatever money you put in.
• Generally speaking, if you have debts with more than 6-8% interest annually (usually credit cards, personal loans, etc), it pays to pay them off before putting money into a retirement account, because the return on investment generally won't outpace the growth of your debts. But see the note about employers matching your contribution.

This board, iirc, has at least one member who is a professional financial advisor, so I'm sure he'll be able to offer much more specific help.

 

[RoJoHen]

One of my best friends is a financial advisor, but I tend to tune him out when he starts talking about work.

 

[Rocketman]

One of my best friends is a financial advisor, but I tend to tune him out when he starts talking about work.

Hey, if he's willing to help you out for free, the best money advice any of us can give you is to stop tuning him out

The second-best is 'start now'. The fun thing about financial planning is that you can make it as complex as you want it to be, including projections of inflation, health care costs and living expenses in 2040 or so. The risk of overcomplication is that the information overload keeps you from starting now rather than when you hit your thirties or forties, which has repercussions.

If you want a short summary, if you have money to spend on 'the future' (and find out how much you're willing/able to save), you should use it with the following priorities

1. Pay minimum payments on loans/credit cards (duh)
2. Contribute to your 401k up to the extent matched by your employer (if any).
3. Pay off high-interest loans (more than 6% p.a.)
4. Put money in an IRA, choosing a single low-cost global index fund (at your age), up to the tax deductable amount
5. Pay off low-interest loans (student loans, mortgages)

 

[Locutus of Bored]

I can tell you that, as a Brit, they really should have thought that acronym through a bit further.

I have no idea what that means.

He's referring to the Irish Republican Army (IRA).

 

[Hermiod]

First you guys write Star Trek episodes where they won, then you name your investments after them. Tsk.

 

[Star Wolf]

One of my best friends is a financial advisor, but I tend to tune him out when he starts talking about work.

Hey, if he's willing to help you out for free, the best money advice any of us can give you is to stop tuning him out

The second-best is 'start now'. The fun thing about financial planning is that you can make it as complex as you want it to be, including projections of inflation, health care costs and living expenses in 2040 or so. The risk of overcomplication is that the information overload keeps you from starting now rather than when you hit your thirties or forties, which has repercussions.

If you want a short summary, if you have money to spend on 'the future' (and find out how much you're willing/able to save), you should use it with the following priorities

1. Pay minimum payments on loans/credit cards (duh)
2. Contribute to your 401k up to the extent matched by your employer (if any).
3. Pay off high-interest loans (more than 6% p.a.)
4. Put money in an IRA, choosing a single low-cost global index fund (at your age), up to the tax deductable amount
5. Pay off low-interest loans (student loans, mortgages)

Do you know how many books, radio shows, TV shows, magazines, newspaper sections, discussion board questions/awnsers boil down to that awnser? The only thing to add is that emotionally some people find it hard to empty their savings to pay down credit cards or invest on a day when the market is dropping out of fear that it will never rise. All the advice in the world, free or paid for will not overcome the fear of some people and many never take advantage of employer matching funds in retirement accounts or any other investment because of that fear. In the extreme that fear leads to investing in canned food, weapons and ammunition.

 

[the 4th hanson bro]

• I know that you basically have the choice between paying income taxes on your retirement now, and paying income taxes on your
  retirement later. Which one you want depends on what you expect your future income to be, and what you expect the future tax rate to be.

Not entirely true. By properly diversifying your investments now from a taxation of gains perspective, you can have more control over your future tax rate than you might expect. For example: dump everything into the IRA. Great tax advantage now and tax deferred growth. But when it's time to take income, it's all taxable as ordinary income.

Spreading your retirement dollars out between fully taxable (IRA), partially taxable (regular mutual funds/ stocks) and tax free (ROTH IRA) distribution treatment gives you more control of your tax rate in retirement. Tax rates vary widely through history. As tax rates increase, if you have money available that you can either get to fully tax free or partially taxable, you don't have to dip into your fully taxable bucket for income.

• If your employer matches your contributions, that's like an instant 100% return in the first year of whatever money you put in.

Never pass up free money.

The second-best is 'start now'. The fun thing about financial planning is that you can make it as complex as you want it to be, including projections of inflation, health care costs and living expenses in 2040 or so. The risk of overcomplication is that the information overload keeps you from starting now rather than when you hit your thirties or forties, which has repercussions.

The earlier you start, the better off you will be. Search for a "Future value of money calculator" and see for yourself what an extra 10-15 years may mean.

1. Contribute to your 401k up to the extent matched by your employer (if any).
2. Put money in an IRA, choosing a single low-cost global index fund (at your age), up to the tax deductable amount

If you are eligible for a 401(k), whether you are contributing or not, you are not eligible for a deductible IRA. THe ROTH is a better option for you due to the tax advantages in the future.

Get a notebook and for a period of 2-4 weeks, write down how much you spend and on what every time you spend money. Doesn't matter if it's for a coke at the gas station. Write it down. You'll then be able to see where your money's going and then you'll have a better idea of how much you can save.

Save enough so that it pinches or feels a bit uncomfortable at first. You'll adapt and find yourself able to save more.

Before you invest for flash, make sure you have a cash reserve worth 3-6 months of living expenses. That's your safety net so if the tranny falls out of your car, you don't have to put the repairs on a credit card.

 

[Holdfast]

One of my best friends is a financial advisor, but I tend to tune him out when he starts talking about work.

Hey, if he's willing to help you out for free, the best money advice any of us can give you is to stop tuning him out

+1 Seriously!