As has been mentioned, Roth is post-tax contribution (principle and proceeds not taxable after eligible withdraw) and traditional retirement accounts are pre-tax contribution (principle and proceeds taxable after eligible withdraw). Also, IRA and 401k are two different things with different contribution limits. 401k is $18k per year combined individual/employer contribution and IRA is $5.5k per year (individual contribution only, with higher “catch-up” limits at 55 years old or more). IRA is also limited by income, so if you make considerably more than $100k per year as an individual, you may not be eligible to contribute any or all of the limit. I’m not sure what the numbers look like for married folks.
Roth started as an IRA thing but many 401k plans offer Roth now, too. So you have contribution limits on 401k and IRA that are separate. In each of those funds, you (not always with 401k) have the option (traditional) to invest pre-tax income now and pay tax on all funds you withdraw in retirement or (Roth) invest post-tax earnings now and not pay tax on anything you withdraw from that fund in retirement. You can (as Grrlbrarian mentioned) also withdraw Roth principle, but not proceeds, prior to retirement eligibility without penalty or tax. Early withdrawals from traditional retirement funds are penalized and taxed.
Finally, I should say that while I think everything I posted here is correct, I know frighteningly little about money management and you shouldn’t actually believe anything I say about the subject.
One thing I don’t think gets enough attention regarding “saving” for retirement is keeping yourself healthy. Best investment you can make is taking care of your one and only body.
If you have a chronic health problem get it under control and keep it there. Exercise. Eat healthy food (an occasional splurge is OK). Moderate use of things like alcohol.
Keeping as healthy as possible does several things:
If you’re healthy and fit you CAN work later into life if you need to do so
If you’re healthy and fit your medical costs should be lower
If you’re healthy and fit you’ll enjoy your life - pre- or post-retirement - much more.
Otherwise - sounds like you’re doing better than average.
Me, I decided a long time ago to work until at least age 70 - more time to save, better payouts on both SS and my pension (assuming both are still in existence when I retire). The only way I can do that is by taking care of my health.
You may not be able to work full time much past 65 or so. For one thing, age discrimination is real. For another, you get tired and your body starts giving out on you
However, planning on working part time in your retirement for as long as it works for you is a great idea. It keeps you active, keeps you in contact with other adults (that aren’t your spouse who you are driving crazy with your constant presence), works your mind a bit - and can keep you from needing to access the savings you have
Grrlbrarian, it sounds like you are doing awesome - you sound like a single parent for at least two kids - and its darn hard to raise kids on a small income. Take up reading frugal websites which may give you some other ideas on how to cut spending, if you don’t already. If the kids are old enough, consider boosting income with another job - even if its just watching people’s kids on weekends or something.
I’m curious as to how you’ve managed not to make any money in an invested retirement account. I’m not a brilliant investor by any stretch of the imagination, yet over the last 13 years the average annual rate of return in my retirement plan has been 9.19%. That’s a period of time covering the Great Recession so it’s not like I cherry picked a good decade. Thirteen years is as long as I’ve been with my current retirement plan, but previous returns were similar.
How do you not make money in the market? Have you just been invested for a year or two? Because my 12 month rate of return is just 1.2%. If you just looked at the last year it might give you a skewed idea about future returns.
Yes thank you, I know what 401ks and Roth IRAs are and the differences between them. My question was what advantage there was to NOT maxing out the 401k before starting a Roth IRA. Do most people max their 401k first, and then move to Roth IRA, or start Roth before maxing out 401K?
Commit yourself to living well below your means. Living an “affordable” life style is, by definition, spending ALL your income on your cost of living. Nothing is left over.
Live on less than you can afford, and whatever you have left over at the end of the month is your “savings”.
Fix your lifestyle expectations, and the rest will take care of itself.
The OP is already living on less than he/she can afford, given the Roth IRA contributions that are about ten percent of income, and the further five percent 401(k) contributions.
Yep, I’m planning to delay full retirement until age 70 but hope to go part-time at 65. I’m just terrified that my body will wear out too quickly, and that plan will fall through. Reading around on a few websites has indicated that’s a pretty common problem, so I’m fighting to put myself in the best possible position. I take care of myself - work out 5x a week, remain at a normal weight, and eat healthy - to increase the odds in my favor, though the unexpected can and will happen. I think it was **Broomstick **who said that prevention is critical to health and financially savvy: totally agreed.
I do work a second job already - I teach part-time at a local community college online or one night per week, depending what they want - but I’m not getting year-round classes anymore, so that’s an issue. Thanks for the props and suggestions. I’m compiling a reading / to-do list!
My point was that you have to make the psychological commitment to an austere lifestyle first, and then you can feel OK about having a balance to save. As in " give! up! my! daily! latte!". Create a mindset in which you do not “give up” anything, but feel comfortable in austerity.
And my point was that if you read the OP, he/she is already doing that; no debt aside from a mortgage, wears used clothing, uses the library instead of buying books and CDs, etc. He/she is actually more disciplined than most.
The one-size-fits-most version of the advice on this is:
Invest in 401k (or 403b or whatever else is applicable) up to the max employer match - the match is a guaranteed return that will almost always be your best choice
Invest in Traditional or Roth IRA up to the $5.5K limit - you have control over where you’re investing it, so an IRA at a low-cost provider like Vanguard or Fidelity is likely to have more choices and lower expense ratios than your company 401k plan
Then you look back at the rest of your 401k tax-advantaged space if there’s more to save… or other tax-advantaged options (HSAs are pretty common these days), or eventually taxable accounts
There are all sorts of other considerations (thus, “most”), but the core of the argument is that most company plans are less diverse or more expensive than what you can get from a self-directed IRA.
Given this and the fact you have your car paid off, the fact is that there is little you could do further without making sacrifices that would genuinely impact your quality of life. That’s my honest opinion.
You are doing far more than most people and you are already very well prepared. Having no mortgage is a huge, huge advantage, reflected in your saving a fairly reasonable amount for your income. It’s nice to have a good retirement income but you have to lead an enjoyable lifestyle now, too.
Wow. It’s a Metlife account because that is what the employer selected. During the years when the housing market was crashing it actually lost money. Since then it has just kind of stagnated. It’s supposed to a “conservative” investment scheme that builds wealth over the long haul, although that has yet to happen. Perhaps I should should switch to a different scheme?
I would revisit this allocation with a financial advisor of some sort. In most naming schemes “conservative” is about maintaining value more than building it, and that is what you’ve observed. Usually the goal with a conservative plan is to roughly keep up with inflation. It makes sense for someone in their 60s or 70s, or someone with higher-risk assets outside their portfolio, but is probably not what you want.
I would. I don’t know if you changed strategies following the recession, which is usually the best way to lock in losses, or if you’ve just stuck with an overly conservative allocation, but those returns are terrible. The S&P index 10 year return is 57.6% as of April 2016. I hate to tell you, but you missed the third longest bull market in history.
Do you feel comfortable managing part or all of your IRA account yourself? If it were me (and we’re about the same age), I would invest most of my IRA money with a diversified dividend growth strategy. 25 years of reinvested dividends can really add up. Otherwise, a big S&P 500 fund will probably have the lowest fees.
It sounds like you have it pretty much figured out, though. You have a lot of time left. If you continue investing $10,000 per year until age 70, you will contribute another $250,000 before you retire. A wad of cash like that all in one place can generate $10k+ a year just in dividends, depending on how it is invested. Or who knows, maybe in 25 years bank interest will come back and you can safely supplement your income that way. Your mortgage should be paid off by then, so you will be able to live very cheaply. I think you will be ok.
Since you are paying your kids’ college tuition, you could lean on them for help later. Tell 'em stories about how families in Bangladesh have 6+ kids so that someone will be there to work the farm and take care of them in old age. You’re not asking so much…
House - Purchased for $103,500 in 2008. Valued about $125K now but that’s not a current appraisal, just Zillow’s best guess. I want to say about $98K remaining on the mortgage since it was re-fi’d once; not sure of the current interest rate but I remember it as being about 4%. Monthly mortgage payment of $711 includes property taxes held in escrow.
Car - 2013 Toyota RAV4. Paid off. Gas mileage around 24-26 mpg. I want to say the mileage is around 40K.
Phones - About $65 per person per line; it’s at $194 for three lines per month (Verizon). The phones themselves came free with the contract; I paid for the activation fees on all by trading in my old phone, which was in perfect shape. Contact is up a year from October.
