by Ashley
I am really proud of ourselves! When 2014 began, I made a full list of “goals” (I prefer the word “goal” over “resolution”). This is a technique I actually learned from a career workshop I took a few years back, called “Career Mapping” (but I applied the same principles to all aspects of my life).
Basically, you think of your longer term goals (can be 10 year, 5 year, or 1 year). I started with 1-year goals in categories such as: financial, family/relationships, career, hobbies, etc. The idea is that you first come up with concrete “long term” goals. Then you “map out” your entire year by breaking up the big goals into smaller chunks. For me, I broke down the goals by month so every month I know a small, reasonable goal that I want to attain (with the idea being that all the small goals ultimately lead to fulfillment of the bigger, long-term goal).
Anyway, when I first did my 2014 Goals (Life Mapping, if you will), I did not think we would be able to pay off our credit cards by the end of the year. With about $1,000 per month for debt payments, coupled with $10,000 of credit card debt, plus additional other debts to account for, I thought it was an impossible goal. We would be close, but not quite out of credit card debt yet.
When I started blogging here (in March) I set the official goal date: March 2015.
And here we are….the beginning of June 2014. And I can officially say “We are credit card debt-free!!!!!!”
It’s a fantastic feeling!
But being me, I’m always looking ahead. I wish the credit cards were our biggest obstacle, but unfortunately, that’s just the tip of the debt iceberg. The cold, hard truth is that we still have over $100,000 of debt. About $95,000 of student loans, $22,000 of car loan, and $8,000 of medical debt (note, these are approximate numbers that are being rounded off….my last “official” debt update was here and I’ll do another one probably next week).
With this amount of debt, its difficult to put everything on “hold” until the debt is gone, because we’re looking at YEARS worth of repayment.
So I want to submit a question to readers: At what point do we begin long-term savings for retirement?
I know the Dave Ramsey school of thought is not to begin retirement savings until one is debt-free. However, there seems to be some ambiguity, because I’ve also heard (on the radio show) Dave tell people that if their debt repayment is going to take a significant amount of time (though what constitutes “significant” is not clearly defined), that they should not forego retirement savings for the entire time.
Currently we are 30 and 31, respectively, and have a reasonable EF (approx. $11,000), but no official “retirement” savings – no 401K, Roth IRA, etc.
This also begs the question of what constitutes an EF versus retirement. Some of our funds (about $6,000), which I have considered part of our “EF” is actually tied up in money market mutual funds. Although technically liquid, if we were to dip into it we would have to pay taxes on money made from their sale (dividends are currently reinvested) and my plan has been to NOT touch the money. Given these circumstances, wouldn’t this be better referenced as “retirement” funds as opposed to an emergency fund?
Right now I think we would like to keep up our Gazelle intensity with debt repayment. We need to knock down some of our debts so that once my school loan deferment period ends (February 2015), we will comfortably be able to make the huge payments. But at that point, I’ve always said I don’t feel the same “intensity” to eradicate the student loans as I have with our other debts. Would it be wise, at that point, to begin saving some toward retirement?
What percentages would you be putting toward retirement versus debt? Obviously, we’ll have minimum payment obligations so we’ll have to abide by that, but anything above minimums – would you put 50% toward retirement and 50% toward extra debt payments (as an example)??
I’m just trying to think these things through and come up with some sort of long-term “game plan” for what to do with our money.
Advice and suggestions welcome!
Hi, I’m Ashley! Arizonan on paper, Texan at heart. Lover of running, blogging, and all things cheeeeese. Freshly 40, married mother of two, working in academia. Trying to finally (finally!) pay off that ridiculous 6-digit student loan debt!
You should definitely be saving for retirement now that your high interest rate debt is gone. Dont miss taking advantage of tax-advantaged accounts, such as the Roth IRA, and the self-employment IRA. Fidelity has an excellent retirement calculator that will help you determine how much you need to save.
I’ve thought about starting a Roth and actually looked into it with our current money market account, but I don’t like their terms (our money market is with American Funds, which is great for mutual funds, but costs $10/year annual fee for a Roth and I’d like to find somewhere free). Would you start funding a Roth IRA now (2014) or wait until some of our other debts are knocked down (starting in early 2015)?
Here’s my thought on this. I put off saving for retirement till i was in “a better” place and i regret it. You can’t beat compound interest.
I suggest the following. Open a roth IRA – Fidelity and Vanguard have the best index funds and other low cost mutual funds. there is a 3k minimum to open vanguard and a 2k minimum to open fidelity. However, fidelity will waive that if you contribute 200 dollars minimum a month. I think that’s a good amount to start with. I did that last year and my account is already up 30%.
The roth is good because you can withdraw your contributions penalty free if something comes up.
Takeaway, don’t wait to save (both retirement and regular savings). At this point, your loans can always be put into deferment if something catastrophic happened even if the interest keeps accumulating but you can’t get these years back for the savings.
Just keep it small. I say maybe 20% retirement and 10% regular savings and the 70% can go to debt.
Thanks! I really appreciate the advice!
Don’t quibble over $10 a year if it offers benefits like easy transfer of money between acounts, good customer service and a good choice of funds with low maintenance fees. Forest for the trees, Ashley.
Yeah, I don’t even know about the other things (maintenance fees, transaction fees, etc.) I need to do some research with various places before committing.
I’m interested in what people think about this as well, as we’re in a similiar situation.
I wondered about this as well earlier today (congrats, by the way, on knocking out those cards!).
I contribute a paltry 2% of my income to my 401k because my employer matches us up to 2%. If there were no match, I would probably suspend contributions until my card debt is gone. Any chance either of you gets any kind of match like that? Because if you do and you’re not contributing at least enough to get the match, you are throwing away free money. As Dave says, there are no retirement loans (lol).
At this point, a year or so isn’t going to make much of a difference as far as your retirement investments growing. But I beg you — I absolutely beg you not to wait if you can possibly stand to start with anything at all. Because what you need on your side more than anything else for your money to grow is time. The more time you can give it to grow, the better off you will be. And then once it’s there, DON’T TOUCH IT. Leave it. Forget about it. And increase it as you can.
All of my retirement deductions come out automatically. I left it alone and didn’t touch it for over 10 years, which is why I almost had a stroke when I realized how much I’d saved — and how much I stood to lose in my divorce. 🙁
I was very lucky to begin my career in financial journalism, so I learned very early on about compound interest on investments and paying yourself first. Were it not for my divorce, I’d be sitting so freaking pretty right now it wouldn’t even be funny. I was on track to retire at 50. Blergh.
But …. I’m still grateful I know enough not to hope that I might someday get back some of what I’ve paid into Social Security. I’m not even factoring it into my retirement calculations, although of course I sure something is left by the time my retirement age rolls around.
You’re already so far ahead of most other people your age. Starting a ret fund will give you yet another edge. Just my 2 cents.
Thanks Helene – sorry to hear about the divorce and money lost! : ( Unfortunately, neither of us get any type of “matching,” but I know there are self-employment funds that we could get (in addition to a Roth IRA) that are tax advantaged. I need to get some books from the library to learn more. Thanks for the advice – it definitely seems like people are leaning toward starting savings now.
You can fund your 2014 Roth IRA until April 15, 2015, so you have some time. One thing to consider is keeping your emergency fund in your Roth IRA. Since it is funded post-tax, you can pull out the contributions at any time for any reason. The interest needs to remain in the account, however, you can pull that out without penalty to buy your first house.
My suggestion for you would be to open a Roth IRA and begin the investment with some of your emergency fund. This can then be your emergency fund/house downpayment fund/retirement fund.
You should also look into a SEP IRA for the business. It comes with the added benefit of a tax deduction, so most people calculate how much to contribute when they prepare their income taxes so as to take as much advantage of the tax deduction as possible.
Genius! I have to admit I don’t know a lot about retirement savings, so I didn’t know these things (i.e., can fund 2014 until April 15, 2015….or that you can pull out money penalty-free). I swear, I have learned SO MUCH from the wealth of knowledge that comes from you readers!!! Thanks so much for your advice!
I was in a similar spot. I had 100k in student loan debt and I was 31. I decided to put 3% of my pay towards retirement while getting rid of debt. My debt is now gone (I qualified for loan repayment via national health service corps) and I’ve been slowly improving my financial situation- all the student loan payments haven’t gone to retirement. Instead I’ve replaced a stolen car, bought a house (which I consider to be retirement savings in a way) and have cash flowed a lot of expensive medical care and a wedding. Every raise I get, I increase my retirement savings by 1% point, so it steadily increases while I take care of the rest of my finances and responsibilities. I would start retirement savings at a nominal level once you know you’ll be able to fund your student loan payments and then steadily increase it as you pay off individual loans or get raises. I agree you shouldn’t wait until the student loan payments are completely gone.
I have similar thoughts to the previous posters. . . btw CONGRATS on being credit card debt freeeeee!
I think you need to start saving for retirement now. There may be loans for school, home, cars, medical debt, and just about anything else, there are no loans for retirement. You can start small, but you should absolutely start contributing to something as soon as you can. Roth IRA’s are a great place to start, beyond that, I suggest speaking to a financial advisor who is not going to sell you anything but wants to talk to you about what you should be doing now to have enough money in retirement. My husband and I went to his HR department’s financial advisor and he gave us a really good look at where we are, where we will be and what some of our different options are. There was no “products” to buy, it was just him crunching numbers and answering questions. I understand that you and your husband don’t have that available through your respective jobs (self-employed and your teaching/research jobs) but maybe you can do some research about who to speak to?
Keep up the great work, you and your husband deserve a big pat on the back! AND a reward, like setting up retirement savings so after all your hard work, you can relax and enjoy the fruits of your labor 🙂 (sorry, I am a huge believer in getting retirement-ready ASAP so I can sound a bit pushy about it. But, when you see ALL the articles about people not having retirement funds saved, it starts to sink in that we all need to be proactive about our future)
Thanks for the advice! I definitely didn’t think it sounded “pushy” at all! I really appreciate it!
Hi Ashley-
I would consider the interest rates on your debts when considering when to start your retirement funds. Consider talking to a financial adviser, they can give you information about what the average rate of return is long-term. You would then need to consider how much risk you are willing to take with your money. For example, if the person you talk to says that with the amount of risk you are willing to take their average return on investment over the past X number of years is 10%, then I would recommend starting your investments once you have knocked out all debt with an interest rate 10% and above. There is no point in starting to invest if that money is earning less interest than you are paying on debt. (That being said, it would mean hanging on longer to those lower interest debts that I know you often think of just wiping out to be done with them.)
I also agree that you should consider calculating how much you feel you need to retire comfortable, and how much you would need to start putting away per month in order to meet that goal; there are calculators that ask how many years until you plan to retire and they calculate that amount. There are lots of online calculators that can help you determine all of this information. That number might help you determine when you need to start saving. I know you really want to knock out debt but it might be time to seriously start looking at saving for retirement, the reality is that compound interest really is your best friend when it comes to retirement!
Cheers!
Meghan
Congrats on paying off the credit cards! It is exciting to see progress.
Also, an FYI – unless your Money market is also held inside an IRA, you should not incur any taxes to dip into it. When you earn a dividend that is reinvested, you pay taxes on the dividend whether you reinvest or take it out, so everything in the account should be free and clear of any additional taxes (plus a money market never gets hit with capital gains taxes since in theory the price per share should never deviate from $1.00). With interest rates as low as they are you may have not received a 1099 for this in the past though since many institutions don’t issue 1099’s if you earn less than $10 in interest/dividends for the year. (Please don’t consider this formal tax advice though, check with a CPA. I spent about a decade in financial services/banking)
Also – for the other question. In your shoes, I would start saving for retirement once the student loans were the only debt left. When we were on our debt reduction journey, I quit contributing to my 401k even though my company offered a healthy match. I was painful to do so, but we probably paid off the car a couple of months earlier because of it (plus were paying more in interest that I was giving up in match money).
Start retirement saving now. Start with a Roth and that can become your “big” emergency fund since your contributions can be taken out. Then look at tax deferred accounts. IRAs. Your husband next year should talk with a good accountant about the kinds of plans he can start as a small business owner. If you are paid as a contract employee – talk with accountant about becoming a small business so you can set up a plan for you and defer more. Besides retirement – I would focus on the car, medical, building an emergency fund and life happens fund and then create a plan to pay off the student loans more quickly – say in half the repayment period left.
You really do need to be saving for retirement – even a little bit – now.
BTW – when looking at setting up the account – yes the fee to manage your account should be considered but more importantly the fees on your funds should be considered. Do you know the expense load in your mutual fund? How it compares to similar funds? If your fund performs as well as a similar fund but has a higher expense load – you really aren’t doing as well.
We were rolling right along KILLING our retirement savings when my husband unexpectedly got laid off after 12 years in the same job – in the specialized area he is in it took him 4 years to find another full-time job with benefits that we needed. We went through a good portion of our retirement living off of that money and were able to survive but are now playing MAJOR catch up, so my advice is to start saving for retirement as soon as you can – you never know what is going to happen in the future!
I would start a dedicated retirement account, separate from the EF, now. Even if you just get in the habit of $50 per month or whatever, starting that habit will help. If you get a match from your work, contribute up to the match.
Your husband is self employed if I remember correctly, so no pension there? If so I would start sooner rather then later. Even just a little bit a month in an IRA willow add up over time
Some thoughts:
I don’t at all agree with the advice to save for retirement “for a rainy day or in case of unemployment”. You really need an attitude of saving for the long-term future.
That said, a ROTH is a great place to start. I would open an account at Vanguard (lowest fees). You have until April to fund. You can use some of that to double as an emergency fund but I certainly wouldn’t view *all* my retirement savings in that way.
15% to retirement is a good rule of thumb. Maybe 10% if you want to hit the debt a little harder. I don’t see the point to be more aggressive than 15%, with all the debt. The student loans in particular are like a mortgage. I don’t think its wise to pay those off before retirement (same as it doesn’t make a lot of sense to pay a mortgage off before starting to save for retirement, for most people). I would not put a car payment before retirement, personally.
Oh, and your spouse can open a SEP IRA with his business. You would want to look into that because you may be able to generate large tax breaks with retirement contributions. Certainly take advantage. Maybe you can throw the tax savings at the debt. Win-win.
P.S. Congrats on the credit card milestone. Woohoo!!
Thank you so much for all the great advice!!! I really appreciate it!
I agree you need to start saving for retirement and a Roth is a great place to start. Doubles between retirement and EF. There will never be a perfect time to start. Once your debt is paid off, something else will come up. Kind of like when we decided to have kids. We jumped in as there was never going to be the perfect time.
Do them concurrently. I can’t remember if you have a 401k (I seem to think you don’t) but if you do, make sure to always contribute to get the match. That is free money you would be giving up if you don’t.
Hi
I agree that you should start retirement sooner than later. I feel your pain with student loans, I have around 200 K myself. I also agree it would be a good idea for you and your husband to talk with a financial planner. A book I am reading suggests asking your friends and family for referrals, but you can get a list of the financial planners in the area by contacting the Financial Planning Association (800-322-4237 or fpanet.org). Big congrats on getting through the credit cards so quickly :)! Keep up the great work.
But use a fee-only financial planner. You want someone who will not be compensated by selling you products that they make a commission on.
Good point! I didn’t even realize there were fee-only financial planners (just assumed all were commission-based)!
I agree with most of the commenters above. You definitely need to start saving for retirement. When we are young we feel indestructible and think we can work into our late sixties or even seventies but there are many variables affecting that. The income levels change, market opportunities change, our health changes… So many variables we cannot control. If I were you my first priority would be to shop around for a good term life insurance policy and then setting up a retirement account.
Dave Ramsey also believes in giving religion 10% of income during debt reduction. I would start saving now and increase it as you go along.
I haven’t heard anything yet about a college fund for your two girls. Are you going to start one of those too? Frankly, on the PF blogs, I read a great deal about retirement and less about helping kids with college. I know what all the so-called experts say, “Fund your retirement. Your kids can take out loans and pay them off for the rest of the lives.” (And please remember that some of those “experts” don’t even have kids.)
I strongly disagree. I believe a responsibility of having children is preparing them for life. Our four children graduated debt free from college with a combination of scholarships, their own jobs, and the bank of mom and dad. They were able to immediately begin living their adult working lives independently without burdens. Now, they are saving for their own children because they are able. Do you see how the chain of debt is broken? And no, my husband and I will not be traveling all over the world in retirement, but we will be comfortable with all we need and much of what we want!
I was going to ask this earlier but didn’t want to take the discussion away from the ret question. I am sad to admit that we did not start saving for our son’s education when he was born. While my own parents were not able to contribute anything to my college expenses — and I didn’t expect them to, they had 4 kids and things were strapped — I should have done better for my son. Coulda woulda shoulda.
Anyway, as part of the divorce process the financial analyst recommended how much we should each be saving to help our son pay for college. So now we do. I agreed to it as a term of the separation agreement in order to force myself to save for him, even though I actually believe it should be his responsibility to pay for it. I saw so many people at college f-ing around and not being serious about their education because they weren’t paying for it. Sure, I graduated with loan payments. But that motivated me to get a good job and get them paid off. I was lucky my grandma had a cash stash and helped me eliminate a good chunk of the loans. Which I would also do for my son, and in fact I would prefer to fund his education that way — if only to make him more accountable for doing well when he’s in college.
But….it appears I can’t do it my way. And so between my ex-h and I, we are saving $300+ a month for his college expenses.
I have recently begun toying around with the idea of starting a small side account for my son, literally with like $10 a week going in. And just keeping it going for the next 10 years. I don’t know what it would be for. But since my divorce I have become so paranoid about finances, I feel like a squirrel who wants to hide nuts in every possible nook and cranny.
Ugh! Sorry to hear about the messy divorce situation!
I have very mixed feelings on student loans. My parents paid for the entirety of my undergraduate tuition (and I worked to pay for living expenses), so 100% of my student loans are from a graduate education that has NOT worked out for me as of yet. Because of my personal experiences in academia, I do NOT think a college education is the “requirement” that many think it is. I know many people who went into a trade, for example, and are doing very well for themselves (with much less debt than I have). I also agree that many students just blow the money their parents are spending on them. I have vivid memories of college roommates who would photoshop unofficial transcripts since they were failing all their classes and parents demanded a “report card” of sorts…..so, basically, the students were “tricking” their parents into continuing to pay for them while they just partied and never went to class. Its sad, but its a reality. In the past I’ve thought that I would like to have a savings for my kids, but make them fund their own education (either through work or loans), and ONLY after they receive good grades would I “pay them back” (by either paying off the loan or reimbursing their tuition). This way if they just play and do poorly in school then they are stuck with the consequences (and the debt) from their actions. However, that was my thought prior to actually having kids. At this point I’m undecided on how we’ll handle this.
Currently – no, we do not have any money for their college savings. I do think that funding a retirement account would take priority (as many have pointed out – there are no “loans” for retirement). That does not mean this would NEVER be a priority, but just not at this stage in our debt-repayment. Definitely something to think about and maybe even the topic of a future blog post???
Helene, I know that this is often an argument about helping kids with college–that they will just goof around. This was not the case with our four kids. We told them up front that grades would have to be kept up or we would not fund. (Now, I’m now saying straight A’s but they all graduated with honors.) I just can’t subscribe to the notion that an 18-year-old is somehow going to be able to finance his entire education solo. Thirty years ago, a student could do this. Now, even the cost of a state school is high and rising. I feel so sorry for the young adults today who are burdened with so much debt. Mostly, I feel sorry that an adult was not more involved in their lives to offer counsel.
I think if you are emphasizing education, monitoring homework, exploring career options all along with your children, college will be a success for your child. But it has to start at a young age! And I don’t believe that this discussion is hijacking the retirement question. If one has children, their future and your responsibility to them is very much tied in with the parent’s financial future.
Yeah, the ultimate questions are “how well do you know your child?” and “are you dong a crap job raising your child?”–not just throwing up your hands and labeling all 18 year olds as fritterers of their parents money.
I offer a slightly different opinion on retirement savings. I think you should hold off for a bit on the retirement savings. You don’t want to rush into it without doing some research. Plus you are on such a roll with the debt repayment!
How about a slower, more measured approach? Continue getting rid of your debt as fast as you can…..until the end of the year? March 2015? Start researching, reading, and talking to as many people as possible about retirement savings until you feel very confident and comfortable with your decision (and hubby too!). Then put retirement savings in your budget and automate it – you can start out small with a 3% contribution and increase it by 1% every 6 months or so until you reach your goal.
I’d hate for you to just start throwing money into different accounts without first taking the time to do your research, put it in the budget, and really understand your long term savings goals.
I think this is a good idea. I didn’t know (until commenters here pointed out) that I could fund a Roth for 2014 all the way until April 15, 2015. So I could finish up my year’s goals (paying down debt until the student loan deferment ends in February 2015), and then pick up on the Roth at that point, still having 2 months to fund 2014’s Roth before beginning to fund one for 2015. This would allow me more time to (1) pay down debt, and (2) research some options, perhaps talk to a financial advisor, etc.
A word about using a Roth IRA as an emergency fund – I would look into this much more carefully. As of 2006 you could not withdraw your contributions from a Roth without penalty unless you’d had it for FIVE years. It’s possible that may have changed since, but you should definitely check on that. You don’t want to go in expecting your contributions will be immediately available when they aren’t.
As for starting your retirement savings sooner rather than later: YES!!! Start saving now!!!! The sooner you start the less you will have to save each month to have enough by the time you retire. It can be pretty staggering the difference between starting when you’re in your 20s versus your 40s. If you don’t have enough to start an IRA with Vanguard or Fidelity (personally, I like Vanguard MUCH better than Fidelity – better customer service, IMO, and tax forms that are easier to read), then consider starting an IRA CD account at a local bank or credit union. You won’t earn much interest at all, but it will allow you to squirrel away money until you have enough to get an IRA with V&F.
As to Roth vs. Traditional IRA – if your AGI is less than a certain amount it might help you to start with a traditional IRA because you can deduct your IRA contribution from your taxes. The flip side, though, is that you’ll have to pay taxes when you withdraw money from the traditional IRA in retirement. In all likelihood you’ll be in a higher tax bracket when you retire since I get the sense that you are very early in your career. So, strictly by numbers you’re probably better off starting a Roth, but it might help you to be able to take the deduction now with a traidtional IRA and apply the tax savings to debt payoff.
If you need a calculator to figure out how much you need to save for retirement, the Ballpark Estimator is pretty good – http://www.choosetosave.org/ballpark/ . One of my favorite financial columnists, Jane Bryant Quinn, recommended it. And, as a side note, you may find her books on personal finance helpful. I like her because she gives sensible, gimmick free advice.
Finally, if your mutual funds are money market funds why would you pay taxes when withdrawing the money? Money market funds generally keep a share price of $1, so there are no capital gains when you withdraw. I have a Vanguard money market that I use as an emergency fund and a personal escrow for my property taxes. I regularly write checks on that fund to pay property tax and I never get hit with capital gains. The only time I’ve ever paid taxes on that fund was on the dividends earned back when interest rates were higher.
In case you’re wondering why I said, “As of 2006…” That’s when I bought my condo. My mom, who’s a CPA, was helping me figure out what accounts to tap to increase my down payment. She asked for how long I’d had my Roth, and at that point I’d had it for only 1-2 years, so she said I couldn’t tap into it until I’d had it for 5 years.
Jen, you can withdraw your contributions at anytime. So if you put $1,000 in you can take it out 6 months from now without a tax penalty. This is the major reason why the Roth is a great investment idea–
Now, any gains on that $1,000 should stay in your Roth account and grow. So the $50 that your index fund grew in the 6 months will continue to grow until you are 65. The 5 year exception your mom told you about is if you want to use your Roth gains to purchase a home. You are allowed to cash out your gains that have been in the account for at least 5 years (just once I believe) before age 65 without penalty. So if you put that $1,000 5 years ago, you can take $2000 out today for your downpayment.
This is why if you have a Roth the IRS asks you on your taxes each year how much you contributed and how much it grew.
Aaahhh… Thanks for the clarification. It was a while ago, so I had a feeling I wasn’t remembering all the details 🙂
Thanks for recommending this author – I’ll have to check it out! Regarding the taxes from mutual funds, I guess I was wrong on that! Oops! That had been my understanding, but someone else pointed out that taxes are paid annually on the dividends (even if reinvested). I, personally, don’t prepare our taxes so I guess I just misunderstood. Either way, my preference is still NOT to touch those funds. But I guess that’s the goal with any EF, really.