38 years old that just started a job last year that will leave me with a pension and SS when i retire. Currently make 50k a year and will top out at 75k by the time i retire. So far i have zero invested in retirement other than my pension contributions, but i do have 30k sitting around collecting nothing. So the obvious question is what would you do with it? ROTH IRA? SP 500? neither? both?
Wed Jun 01, 2016 1:50 am
oldguy Senior Member
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Joined: 21 May 2006
quote: zero invested in retirement
$30k @ age 38, that's easy - invest in an SP500 Index Fund. That gives you the diversification of moat of the corporations in the US (and most of them have foreign divisions as well). The SP500 Index has averaged about 11%/yr (longterm) for over a century. Your $30k, @11%/yr, will be about $700,000 in 30 yrs.t
As for what account to keep it in - taxable, posttax (IRA), pretax (Roth) - that part isn't so important - ie, $700k is $700k no matter where it is. With an IRA/401k you pay the tax after you reach 70 1/2. With a Roth, you pay the tax first and put the remainder into the Roth. With a taxable account, you pay the tax first, then pay capital gains tax on the profit when/if you sell some.
As for calling it "retirement" - IMO that moniker has steered young people wrong for couple of decades. Before all of the government programs were invented, people like me invested in brokerage accounts to build our live savings & our family wealth. But now, the "govt retirement' accounts have scared off folks, they don't like having their money locked away until age 59 1/2. So they start late in life and only about 35% of workers even join those plans - not good for the future wealth of the nation. So it is good that you are asking these questions before you hit age 40, plenty of time to build up a million dollars before you retire.
Wed Jun 01, 2016 3:39 pm
Whitelion Contributing Member
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Thu Apr 13, 2017 9:12 am
christcorp Preferred Member
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I'm all for investing the $30K. But a lot of areas, that might be important, haven't been addressed.
1. Do you have any debt? Car loans, student loans, credit card balances, etc.
2. Do you have an emergency fund? Take care of high cost unforeseen things like home repairs, major car repair, temporarily laid off or let go from work, etc. In your case, that would be about $20-$25K.
3. Do you have any planned future expenses that this $30K could benefit? E.g. down payment on a house, kid's college
$30K in one hand can be seen as a lot of money. On the other hand, $30K could be considered very little. I am all for investing. And S&P500 type funds are a great place to start. But not if you have debt in the 6,8,10+% interest range. You'd be wiping out just about any gains you could make on the $30K. And while some people are very Pro-Leveraging of debt and don't mind having debt; you have to play the numbers right.
People need to have 5 different pots of money to be successful. Sometimes as life changes, some of these pots can be shifted to another one because you no longer need one of them. But if you don't have these 5 pots, then something can negatively impact your finances and trying to purposely leverage debt may actually backfire. The 5 pots of money are:
1. Daily expenses. This also includes your basic enjoying life spending money. This is your day to day money. Pay the bills.Shopping. Gas money. etc.
2. Short term savings. Larger ticket items but short term. Car insurance each 6mo/1yr; yearly vacation; buy a new tv/pc; etc.
3. Long term savings. Larger long term. Kid's college; down payment for house; new car; (No, I'm not a fan of car payments if you don't have to. I also own a car til it's dead). Planned home renovation; etc.
4. Retirement savings. Obviously very long, and something you don't touch for anything else. (No, you DON'T BORROW from it). IRA, 401K, Pensions, SS,
5. Emergency fund. You never know when your company could downsize and you lose your job. If you're injured and on disability for a few months. Major car repair $5k+ not covered by insurance. Major roof replacement. Emergency flights for family emergency. People find themselves in a situation many times where they need 3-6 months of living expenses paid for to get them by. For whatever reason.
I've seen too many people who don't budget and plan properly. I've seen them go from pretty much debt free, to within a few months because of some "issues" now had $20-$30K in credit card debt. And not being able to pay it off all at once, they are paying 15-20% interest. This is where the debate of "It's ok to have debt" comes in. It's perfectly fine to have debt. And if done properly, can even be leveraged. But if not done correctly, you're simply throwing away money. You'll never make the interest on investments that you're losing on the debt.
But no one is saying you have to fund the 4 non-retirement/investment blocks 100% before investing. The first thing to do is to eliminate any debt that ISN'T a MORTGAGE and/or more than 4%. If not, then just about anything you supposedly earn on the $30K invested, is lost to the interest you're paying. But assuming you're pretty much debt free, determine your 5 savings blocks. #1 can usually come from your paycheck, so you don't need any of the $30K for that. For the others; maybe you do the following: 1-5 as listed above:
1. Comes out of paychecks. No problem
2. Put $5K in this from the $30K
3. Put $5K in this from the $30K
4. Put $10K in this from the $30K
5. Put $10K in this from the $30K
Now, for future paychecks, #1 is taken care of. #2 is high enough and taken care of. #3 gradually add to this to get it to around $10K. #4, have your monthly contributions going into your IRA, ROTH, 401K, private mutual funds, whatever you choose. And #5 emergency fund; gradually build that up to about $20-$25K.
Now some may say it's foolish to have #2, #3, and #5 tying up $35-$40K of your money and not making any real interest. Well, they are wrong. This isn't a matter of "Difference of Opinions". This money is actually making interest. (THE INTEREST YOU AREN'T SPENDING ON LOANS, CREDIT CARDS, ETC). Plus, #3 which is LONG TERM savings, for a house, college education, etc. is money that can be put into longer term type savings. I have MM accounts and CD's that easily get 2-3% interest. Hell, my checking account gets 2%. But other than #2, which is short term savings; stuff you will spend usually within the year; like car insurance, vacation, new tv, etc. the others can be put into some higher bearing accounts. And NO, you don't want it in any type of retirement/investment account, even if you can supposedly take the money out if needed. Retirement accounts work great, because they are LONG TERM. They use dollar cost averaging, and in the long term WILL MAKE MONEY. But in the short term, they can be risky. Even the S&P500 has had negative years. Sometimes, really negative. You don't want to bet on that, plus deal with the taxes. Use retirement for retirement and the others for what they are intended for.