I'm new and starting late

[kendofire]

Hello all! I've been lurking on this forum for a couple of months trying to get ideas about ER.

I little bit about me. I'm 40 and I've just started planning my retirement. I don't have a high paying job. The last three years I have managed between 31k and 35k. I'm also sort of frugal. I have about 7k left in student loans and once that's payed off I can manage on 1000 to 1200 a month.

Last September I opened an IRA with Fidelity with monthly transfers of 200. The company I worked for got bought out at the end of last year and they have added us onto they're 401k. I've just started contributing to that at 3%. They match a quarter for every dollar up to 6%. Currently I have the 401k at 100% of T. Rowe Target 2025 and my IRA is in Fidelty's MMA.

Any advice would be welcomed . Thanks

 

[kendofire]

Oh I forgot to add that I want to be able to ER at 59 1/2. Is this doable?

 

[firewhen]

Kendofire,

Welcome. I did not do the numbers, but I would bet that others who are good at that will. While your income is moderate, your savings rate has the potential to be great. Even after taxes, your net pay should be at least $2000 which means you could be saving about half your pay. At that rate over 20 years, it should grow substantially depending how you invest it. My immediate comment is to raise the 401k contribution to 6% to get the full match. If someone will give you extra money, just to put it into a retirement account for your benefit, why turn some of those dollars down?

 

[Peaceful_Warrior]

Considering how frugal you are, 59 1/2 sounds quite doable. If worse-comes-to-worse you can always start a part-time business from home.

Here's a few helpful hints to keep you pointed in the right direction...

- Contribute to your 401k the 6% so you get the full match before putting into the IRA. Whenever people hand you free money, take it.

- Also, make sure that when you are investing outside the 401k, first you are starting with a ROTH IRA, not a traditional IRA. At your income levels, the ROTH makes infinitely more sense.

- Very wise move to put money towards investing while paying down the student debt. Many people make the mistake of trying to pay off their debt before investing, but when a person does the math and looks at Total Assets after a period of time, they will see that even in most cases paying off a mortgage (with a lump sum) is a financially incorrect decision.

- You'll want to start doing something with that money in your IRA other than MMA so you can take advantage of the next 20 years of equities growth.

- Whenever you get comfortable with your monthly expenses... and you feel like, "This is good. I'm OK now." Invest a little bit more. Even if it's just an extra $5 per month into your Roth IRA... or another 1% into your 401k. Just do it. Then wait a few months until you again feel like everything is comfortable and smooth, and then do it again. You'll find that even as frugal as you are, you can live on much less than you think you can.

- Also remember with the 401k that it'll reduce your taxable income as well, which is why when I was doing the aforementioned "Ratchet it tighter" plan, I would keep increasing my 401k contribution by 1% everytime I got too comfortable.

I could always tell when I got comfortable because that little spending tick would kick in... that thought that says, "It would be really nice to buy that wide-screen TV I've always wanted."

I've finally set a different goal for me on the TV. I've wanted it for over a decade, and have said for a couple years now: When I buy my next place (where I intend to be for 10-15 years or more), THEN I'll buy the widescreen TV. At least this way, I know that the purchase of the TV is not going to be an impulse buy, but rather very calculated and in-line with acquiring new furniture (probably from craigslist or freecycle).

 

[kendofire]

Firewhen,

Thanks, I hoping to be able to inch towards that 6 percent match. Since we are "new" employees with this firm, the end of March is our 90 day period. I hoping that when I'm reviewed next month they will give us raises and I plan on increasing the rate to 4 percent

 

[yakers]

Two things, get the match if there is any way possible. And leave a few bucks somewhere to enjoy life. I do not see life as a trudge through work to finally get to ER. Enjoy what you do and save what you can and when you hit FI, just do what you like even more.

 

[kendofire]

Peaceful_Warrior,

Thank you for the input. As for my IRA. I'm waiting till September when I'll have over $2500 inorder to make a decision. I'm thinking of using one of Fidelity's Target funds. Would this be a bad idea since my 401k is in a Target Fund? I'm curious at why a Roth IRA would be better at my income level, I thought a Traditional IRA would be better?

 

[Peaceful_Warrior]

On the IRA / Roth issue:

With the Roth, when you withdraw the money it will be *completely* tax free, regardless of your income bracket. The reason for this is that you are already paying taxes on it from your paycheck.

With the traditional IRA, it only helps if you are itemizing deductions. At your income level and expenses described, I would assume that you are probably not itemizing deductions on your Federal Return each year (i.e. not deducting for mortgage interest, children & dependents, etc).

Therefore, if you're not itemizing deductions then the Traditional IRA is completely inferior (because you will have to pay tax on the withdrawals in the future). With the traditional, assuming you are itemizing deductions, you will get an income-tax deduction now for the amount you contribute. Usually the tax deduction is more relevant for higher-income earners who are trying to minimize their current tax liability.

Even at your level, your tax liability is so small that I'd rather just put the money into the Roth no matter what. We can't be certain what the tax laws will be like in the future (though many speculate taxes will increase), but we do have now as a certainty.

As for the actual investing of IRA funds:
- For now putting it in a Target fund is fine. You're at a place where your financial knowledge doesn't really allow you to look into other options. However, long term I would recommend learning more about investing and understanding the nuances of various investments and asset allocations.

You'll learn a lot just by reading and listening on these boards, so just be patient. You'll learn through osmosis that Target funds are, generally speaking, not the best place to have your entire portfolio. It's good that you're not trying to pick individual stocks right now... as that is generally best reserved for "play money" and not the stuff you want to actually retire with.

Also, do some reading on basic financial planning and investments. I am sure FinanceDude on here could recommend a few good books that are good for where you're at right now, so drop him a Private Message and see if he can point you in the right direction.

I'm also a follower of the Rich Dad, Poor Dad philosophy -- make money work for me instead of working for money, so I'm looking into business opportunities (right now it's just the small website linked in my signature) to be able to replace my salaried income with a home based business (or a few).

Many people on here are not fans of Rich Dad Poor Dad, particularly because the author (Robert Kiyosaki) has an ego the size of Mount Everest, but there is a lot of basic value to be had from his first book. It serves a simple purpose of inspiring us to 'get out of the rat race' -- so head down to the library and check out a copy of it... at the very least, it'll help open your eyes some and prepare you for the path you are now walking down... the path of financial independence (that's what retirement is!).

 

[jdw_fire]

Firewhen,

Thanks, I hoping to be able to inch towards that 6 percent match. Since we are "new" employees with this firm, the end of March is our 90 day period. I hoping that when I'm reviewed next month they will give us raises and I plan on increasing the rate to 4 percent

Contribute enough money to your 401K to get ALL of the company matching funds, it is free money. Never turn down free money. Do this before contributing to an IRA!

 

[Sue J]

On the IRA / Roth issue:

With the traditional IRA, it only helps if you are itemizing deductions. At your income level and expenses described, I would assume that you are probably not itemizing deductions on your Federal Return each year (i.e. not deducting for mortgage interest, children & dependents, etc).

Therefore, if you're not itemizing deductions then the Traditional IRA is completely inferior (because you will have to pay tax on the withdrawals in the future). With the traditional, assuming you are itemizing deductions, you will get an income-tax deduction now for the amount you contribute. Usually the tax deduction is more relevant for higher-income earners who are trying to minimize their current tax liability.

Please clarify this. Isn't a Traditional IRA contribution deducted on Line 32 of a 1040? It's a deduction from Gross Income. You can do this even if you don't itemize.

Sue J.

 

[Peaceful_Warrior]

Hi Sue,

I didn't realize that... that's definitely good to know. You learn something new every day! Even in that light though, at low income and low expenses I'd put the money in a Roth without question.

However, for other people in different situations, that may provide a better hedge than I previously thought against future tax law changes.

Please clarify this. Isn't a Traditional IRA contribution deducted on Line 32 of a 1040? It's a deduction from Gross Income. You can do this even if you don't itemize.

Sue J.

 

[kendofire]

I'm going to look over my budget and see how I can move to a 6 percent match

 

[Sam]

You are definitely on the right track. Welcome aboard.