What would YOU do next? A retirement question!


Confused about dryer sheets
Mar 20, 2011
Imagine you're 20 years old and you have the opportunity to start saving for retirement again in THIS market and THIS economy. Now you've already opened a 401K with your employer (TSP) and it's grown to just about $4,000. Your monthly contributions are steady at about 9% of your base pay, or $185/month. You intend on keeping the % the same, so your contributions will go up with every pay raise you receive.

Now you've also opened a ROTH IRA-Annuity in Dec '09. The first $1,000 you put in between then and now had a bonus fixed rate of 4%. From here on out, all remaining funds are compounded at a fixed rate of 3%. As of this month, March 2011, the annuity has grown to about $2,100. Your annual contributions are approx $2,000. There are no management fees, and you have no intentions of drawing any other fees like early withdrawal. You're in this for the long haul.

For about $100/month (roughly $600 contributed total so far) you're already taking short term investing into consideration with some higher-risk trading seeking high-yield returns, but you're still left with a reasonable amount of money AFTER establishing your emergency fund at about $6,000 (in a money market account).
You have no CC debt and you have one (auto) loan of $8400 at a fixed rate of 4.24% and the remainder of your spending money (We'll say it's sits around a $2,000 revolving balance) hangs out in a High-Yield Savings Account with an APY of 1.15%.

In terms of retirement, in terms of FINANCIAL RESPONSIBILITY to your future self.. What would you do next? What would you do with an extra $350 or so that you're making per month? Would you focus on paying off that car with the extra income? Invest in mutual funds? Stocks? Bonds? Open another annuity? You've been thinking that one answer is some form of Roth IRA since you're so young and compounding interest wins in almost every scenario.. but you're really not sure if that's accurate since you've been helped along pretty well so far.

Advice for this young and eager investor? :)
Pay down the car loan then promise never to take out a loan to buy a car again. After that, double the size of my emergency fund, then start saving to pay cash for my first rental property.
It depends on what you want to do with your life. Assuming you have no near term plans that would require a material amount of money to be spent (wedding, post-grad, taking a year off work to travel etc) and your job is relatively secure, I would assume from the fact that your question is being posted on a forum devoted to financial independence and early retirement that you are looking for an answer that will help you move in that direction.

If it was me, I would save towards a down payment on either my own home or a rental property. Depending on where you live and what happens between now and when you have enough money to buy, you'll be buying into a depressed market at a time when (i) you can secure long term fixed finance at low interest rates and (ii) you are young enough to wait for a recovery in housing prices. While you are saving up your deposit, invest in some shoes and wear then out looking at as many properties and talking to as many investors as you can - educate yourself on the street not at get rich quick seminars.

Landlording is not for everyone, but I've found the rewards to be worth the effort, both in terms of profit and financial peace of mind.

Based on the above, I would not pay off the car loan early - it's cheap money.
Advice for this young and eager investor? :)
I've never heard of a "Roth IRA-Annuity", but I'd certainly be interested in maxing out the TSP.

With a 2040 retirement date, that seems to be one goshawful long military career you're contemplating. If you put up a "Hi, I am..." introductory post (http://www.early-retirement.org/for...-you-introduce-yourself-27621.html#post516211) or tell us more about your occupation & plans, and give us links to the Roth IRA annuity and whatever "some higher-risk trading seeking high-yield returns" involves, you might get more specific advice.
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Wow, an annuity sold to someone so young. Breathtaking. I hope you at least got kissed.

If I were in your shoes, I would kill the annuity. Invest the Roth money in a long term target fund or balanced fund. I would also start building up after tax savings. Its way more flexible and you can do as you wish with the money (plus it is available if the commode hits the windmill).

Lay off the trading. It is foolish and you will either blow yourself up or get bled dry by the real professionals or the algorithms.
I can't figure out your total % saved but I would certainly dump the annuity thing. And once I got up to a good level of long term FI savings (say 25% or so) I would start saving for a house, then travel, then frivolous toys. You are 20 -- don't forget to have fun along the way :)
I agree with getting rid of the annuity. The money in the Roth is already tax protected and does not need the extra level of an annuity which I'm sure costs you more. Put the money in a stock market index fund and you'll make 8-10% annually (on average)

Also pay off the car. You are currently paying more interest on that car than you are making on the Roth annuity.
Not sure what a Roth IRA-Annuity is but 3% is too low return for anything with a 40 year horizon. IMO, somebody is making money selling you a financial product you don't need.

My advice to my children (same age) is to avoid debt, particularly car loans and invest before and after tax income in a full market stock index fund and bond index fund. For a 20 year old, it should be about 80% stocks, and 20% bonds.

I've never done short term trading. I've got friends who've tried it and most lost money net but it took a long time for them to realize this. None of them beat an index fund for more than a few years.

I've also got friends who've made money as a landlord. However, it's not an easy job. It takes talent, time, and work to find good properties, negotiate good prices, manage them, and keep the income stream going (eg finding good tenants). If you don't have the talent, time and energy to do the work, then you shouldn't go this route.

Kill the trading. Pay off auto loan. Don't invest in anything outside of roth / 401k until they are maxed out (at least 16.5k / year). Buy low cost index funds. Make an investment plan & asset allocation and stick to it.
I agree with getting rid of the annuity. The money in the Roth is already tax protected and does not need the extra level of an annuity which I'm sure costs you more. Put the money in a stock market index fund and you'll make 8-10% annually (on average)

8-10% a year? The last 10 years?
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