| Teacher just out of debt, planning for future |
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Archibald Beechcroft
New Member
Cash: $ 0.70
Posts: 3
Joined: 19 Aug 2017
Location: Vermont
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| Teacher just out of debt, planning for future |
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First time post on any sort of financial forum so please bear with me. I am finally out of my student loan debt after starting my own small business on the side (went from 38,000 last September to owing nothing this August). With that being said, now that I am completely debt free (I don't own a home), I'm interesting in having my money work for me or at least allowing it to compound over time the easiest way possible. I am not really into investing large sums and would rather go the way of a Roth IRA. My school offers a 401k plan, but they do not match anything. The annual returns are roughly 3 percent and have been that for the last 10 years. Not many teachers are taking up on this 401k and many don't even have one at my district. I've been reading a lot of books in the past few weeks about the best course of action but am getting mixed signals from people. I have yet to go to a financial advisor yet regarding this. I have a baby on the way and would like to get some sort of life insurance eventually (not sure which is the best although term seems to be knocking at my door). This is my 8th year teaching and I've completely avoided all things financial because I was young and foolish. Paying off my loan has inspired me to be more proactive with my finances than reactive like I have been. I am currently 32 years old.
Two questions I'd like to pose for anybody who is willing to answer and give me advice. I thank you in advance.
1.) If I were to go with a Roth IRA over a traditional 401k, how would I go about setting one up? My school has no literature on Roths and doesn't even have any formal financial training on setting up a 401 k. Just a booth and a pen to sign.
2.) Are the Roth IRAs based off of mutual funds composed of index funds, etc. I am not extremely financially literate but am working on it.
Many thanks for your time and advice.
Daniel
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Sat Aug 19, 2017 3:28 am |
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oldguy
Senior Member
Cash: $ 751.85
Posts: 3656
Joined: 21 May 2006
Location: arizona
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Congratulations on your soon-to-be baby! Use only "term" insurance, the other types try to mix investing with insuring - the salesperson does great - and you get the worst of both - so never ever mix investing and insuring.
As for pondering the type of account - Roth, Trad IRA, 401k, Taxable - etc, that really isn't the key metric (even tho lots of ink is spent debating the subject). The key variables are 'time' and 'return'. The power of compound interest is surprising to most people - and the compounding works the same in any type of account that you choose.
You have about 30 years of 'wealth-building' in front of you - hopefully followed by many years of 'wealth-preservation'. A reasonable goal is to select 11%/yr investments for building wealth - and select 5% or 6% products for preservation and income.
Eg, if you and DW invest $800/m into an 11%/yr fund, it will be about $2,100,000 when you are 62. If "time" is cut to 20 yr, it will be only $680,000. And if the "return" is cut from 11% to 8%, it will be only $1,200,000 in 30 yr. The point is that both "time" and "return" are key elements.
As for the debate on type of account - if you use Roths, you immediately pay Fed & Vermont tax on the $800/m, say about $200/m, and invest the remaining $600/m. That will be $1,600,000 in 30 yrs., tax free. Or if you choose a TradIRA and invest the full $800/m, it will be $2,100,000 but you'll owe the taxes (which cuts it to about $1,600,000 net). The point is that, you end up in roughly the same place in either choice.
Disclosure. I picked the 401k when they started in about 1982, when I retire in 1998 it had about a million in it. And that was before the 'match' was invented. And before Roths were invented - so not so many choices in those days. I selected the SP500 Index Fund for mine - and that's what I would choose today. It has a longterm average return of 11%/y, it has had that for decades. John Bogel's book, The Little Book of Common Sense Investing, does a great job of reducing the complexities into practice.
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Sat Aug 19, 2017 3:57 pm |
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Archibald Beechcroft
New Member
Cash: $ 0.70
Posts: 3
Joined: 19 Aug 2017
Location: Vermont
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| Thank you |
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Your help is much appreciated, thank you so much for that and the baby wishes. Read you loud and clear. Ordered Bogles book. Do you suggest any specific place: fidelity, etc?
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Sun Aug 20, 2017 3:22 am |
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oldguy
Senior Member
Cash: $ 751.85
Posts: 3656
Joined: 21 May 2006
Location: arizona
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quote:
any specific place: fidelity, etc?
Yes - Fidelity and Vanguard are the Big 2. They compete in the same business, provide essentially the same services, and both have been there for decades - as such their services and prices are necessarily the same (if they weren't one would have won most of the business by now).
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Sun Aug 20, 2017 3:23 pm |
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