KatherineLee88
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I am happy I found this forum. I am seeking some good advice about my plan to start a Roth IRA in about 6 months.
Right now I am unsure if it is a smart financial move considering the amount of student debt I have and my current income so I would appreciate any feedback.
About me:
22 female. Full-time PhD student employed as a Graduate Research Assistant taking home about $1,750/mo. I will continue to receive this income (which they call a "living stipend") for the duration of my PhD studies, which is probably about another 5 years. I am incurring no more tuition fees, or student fees during this time.
My expenses are about $1,000-1,100/mo which are composed of a car payment of $216/mo to the Bank of Mom and Dad (@4% yippy!), apartment rent $315/mo, and food/cell/car insurance/FUN, ect expenses composing the rest.
This leaves me about $600-700/mo extra which I have been using to pay down my student loans.
For student loans I have:
13,000 SELF loan variable at 3.8% - not deferred
4,500 Ford Federal Direct Unsubsidized - deferred for ~5 years at 5-6.8%
19,500 Ford Federal Direct Subsidized - deferred for ~5 years at 6.8%
Oh, and in case you're curious:
Car loan - $6,800 remaining at 4% from Bank of Mom and Dad, 32 months remaining.
I recently started listening to Suze Orman podcasts, which got me thinking about personal finance, investing, and most prominent in my mind right now: retirement...
I technically have another 5 years of PhD training followed by another 2-4 years of post-doctoral training before I enter the "workforce" and have a REAL job. But... I could start a Roth IRA in the meantime, right?
I was looking into either Vanguard or T. Rowe's IRAs. But I am leaning more towards Vanguard since I've heard other people using this company and being pleased with it.
So the pre-Suze Orman/personal finance obsession plan was to pay whatever I could every month (~500-600/mo) to the loan I cannot defer (13k @ 3.8%v), but since I'm realizing that I really do have a guaranteed income assuming that the government continues to fund the National Institutes of Health -> land grant research university I work at -> my paycheck, I'm okay for 5 years.
The post-Suze Orman/reading a lot of personal finance books/internet sites, the action plan is I could pay around $150-200/mo for the loan for 6 months and use the other 400-600/mo to save for the initial $3,000 deposit required to start an IRA in the Vanguard Target Retirement 2055 Fund (VFFVX). Then I would be required, if I understand correctly, to deposit $100/mo into this IRA, reducing the amount I could put towards my 13k student loan, but it would be forced retirement savings.
I have convinced myself that this is a good plan since a student loan at 3.8% (but variable) is a "cheap" loan, and even with the 100/mo contribution to a Roth IRA and perhaps 1 to 2k additional contributions to it a year, I could still get this 13,000 student loan paid off before I leave my PhD program. I would obviously end up paying about $300 more in interest payments on the 13,000 loan (calculated using Excel Amortization worksheet), but compared to the forced Roth IRA retirement savings, I think that is a good action plan. Actually, seems stupid to NOT do it. But what do I know?
When I enter the post-doctoral phase of my training, I was told I could STILL defer my Federal Ford direct loans (2-4 years still  )! When I do enter repayment, it'll be a 10 year repayment plan, which I would be making more money ~35-50k/year as a post-doc, so I think I could handle this. Maybe even start saving for a down payment on a house.
Sorry that was long. I was trying to explain my reasoning. Does this sound like a good plan?
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Tue Jan 11, 2011 12:58 am |
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oldguy
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I would retain the use of the whole $37,000 - it is inexpensive use of capital. The subsidized deferred loan is interest free for now, the deferred loan will capitalize the interest, maybe $1500, but again, a fair price for the use of $4500 for 5 yrs.
And then use your extra income stream for higher and better things - ie, wealth building. There are 3 tax-status account types - the taxable, the pretax (401k), the posttax (Roth). The taxable account is for your pre-59 1/2 wealth, accessible money for a fallback EF, available for early retirement, house, rental houses, a small business, etc. The other two accounts are locked until age 59 1/2. During your low income yrs is best to pay the tax now to get tax-free money after age 59 1/2, that's the Roth. And vice versa for the 401k.
But for all 3 account types, the key metric is the investment that you select - ie, an 11%/yr product (such as your Target 2055). $10k/yr for 30 yrs at 11% is $2.2M. At 6% it is only $800k. (Not a linear function). So, the $2.2M is the important part - what account type you keep it in is way less important (I use divrsify into all 3).
Eg of a wealth concept - A $50k loan for 6%, 30 yrs costs $300/m, ie $108k. Place the borrowed $50k at 11% and wait 30 yrs, it grows to $1,150,000. Most people intuitively prepay the $50k loan quickly to avoid paying the $58,000 of interest. But they derail a million dollar plan by doing so.
Are you at Ames?
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Tue Jan 11, 2011 4:12 pm |
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KatherineLee88
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Nope, not Ames. Iowa City (University of Iowa).
So oldguy, what I'm taking from what you're saying is it's a step in the right direction, but I could do more?
Are you suggesting that I focus just on the Roth IRA (using the Target 2055 with Vanguard)? Or should I be adding on something else for pre-retirement investing?
I am convinced I'll do the Roth IRA with 3k to open, 100/mo after that, and perhaps a larger lump of 2k at the beginning of the new fiscal year on top of that.
I am nervous to really do much more than that because I keep staring at the interest I will be paying on these loans and it makes me nervous.
Don't worry coaster - I love my "job" too much to let it fall on the back burner. Who wouldn't love getting PAID to get a higher education that will eventually lead to more career prospects and higher salary than a bachelors?
I love being a graduate student!!
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Tue Jan 11, 2011 4:32 pm |
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oldguy
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quote:
Nope, not Ames. Iowa City (University of Iowa).
I, too, am a Hawkeye - engineer, about a 100 yrs ago.
quote:
Are you suggesting that I focus just on the Roth IRA (using the Target 2055 with Vanguard)? Or should I be adding on something else for pre-retirement investing?
Focus on the Target 2055 with Vanguard. As for the tax status, IMO you should use both a Roth and a taxable account at this point. You need money that is not locked away until 59 1/2. That 'immediate accessibility' allows you to auto-deposit up to 100% of your extra income stream - instead of only 50% or 75% into 'locked' accounts.
quote:
I am nervous to really do much more than that because I keep staring at the interest I will be paying on these loans and it makes me nervous.
LOL - I know, that's why I included that example in my last post.
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Tue Jan 11, 2011 4:52 pm |
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KatherineLee88
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quote:
Originally posted by oldguy
Focus on the Target 2055 with Vanguard. As for the tax status, IMO you should use both a Roth and a taxable account at this point. You need money that is not locked away until 59 1/2. That 'immediate accessibility' allows you to auto-deposit up to 100% of your extra income stream - instead of only 50% or 75% into 'locked' accounts.
I have not done enough to reading to understand what you mean by "a taxable account". I understand that the Roth is basically unaccessible money and I could probably use a pre-retirement, which would be taxed differently than a Roth. Would this be like opening a "General account" with a place like Vanguard, and sticking the money into a mutual fund? I was eyeing this STAR mutual fund offered by Vanguard because it's 1k to start, but that does require 100/mo after that.
I am thinking I'll start a Roth IRA in 6 months after I save the initial, then I'll focus on my car loan and non-deferable 13k loan. After I tackle those in 3 years I'll go back and start a pre-retirement account.
I understand that my loan money is basically "cheap" money right now and I could gain more by investing it, but since I'm ABSOLUTELY new to this - I know paying my student loans is guaranteeing I'll save on interest. I can assume based on market history I would get a better return by investing, but that's not absolutely guaranteed. I'll be a little conversative with my money until I get a couple of the loans out of the way.
Roth IRA in the near future!
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Tue Jan 11, 2011 8:25 pm |
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Darga19
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Another site you may want to check out for opinions:
http://www.bogleheads.org/forum/index.php
Lots of great info on there.
I'd get going on that Roth if I were you. I'm currently graduated and paying down $50k in student loans between my wife and I. We're both making larger payments on the highest interest loans (6.8%) and contributing to the Roth also.
We're starting with a VG target fund also. Remember you can start with the STAR fund and then roll it into a Target Fund when you hit $3k...that way you're not waiting. 
Oldguy and Coaster both are aware...I ask a lot of questions lol! I was a little uneasy of letting my debt hang out for the full term...just as you are. But I didn't want to wait on retirement either...so some of each was the best option for me.
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Wed Jan 12, 2011 2:01 am |
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oldguy
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quote:
I was eyeing this STAR mutual fund offered by Vanguard because it's 1k to start, but that does require 100/mo after that.
Excellent. Later, after you have $3k you can move into Target 2055, or whatever you want. For a general account (or taxable account), select products that have very few trades during the year - that way there is no taxable event. The funs can grow tax deferred for years - forever if you don't sell.
FYI - since the invention (in about 1984) of 401k, IRA, Roth, etc, the public has lost interest in the plain old taxable account - many workers simply increase their contributions until they are maxing their 401k, and consider that to be a 'limit'. I would fund all 3 accounts.
quote:
I know paying my student loans is guaranteeing I'll save on interest. I can assume based on market history I would get a better return by investing, but that's not absolutely guaranteed. I'll be a little conversative with my money until I get a couple of the loans out of the way.
Yes, prepaying loans is analogous to buying a CD at the loan rate - ie, a guaranteed return. So, you must ask yourself - do I want a 4% CD? or a 5% CD? If you are near retirement - done with your wealth building years and entering your wealth preservation years - you will want the CD. If you are in your wealth building years, you might say - no, I need an 8% or 10% or 12% risk level so that I can use the power of compounding.
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Wed Jan 12, 2011 3:10 pm |
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KatherineLee88
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Thank you guys for your input before.
I'm expecting my Federal tax return at the end of this week and I am pretty anxious to get started on a Roth IRA.
So anxious, I think I might just change my plans and start a Roth IRA Target 2050 fund at T. Rowe Price instead of Vanguard.
The reasoning? T. Rowe Price requires $1k to start whereas Vanguard requires $3k. I will have the $1k by the end of this week and I want to get started. I've done some reading about the different target retirement funds at these companies and I guess I'm still a bit hesitant about this choice.
Because:
T. Rowe Rice has a higher expense ratio - 0.73% vs. 0.19% at Vanguard.
However, T.Rowe Price's target retirement fund has a 4 star Morningstar rating. I read a bit about how they do their ratings, and I think the T Rowe Price is a good fund. Additionally, T Rowe Price apparently has a more "aggressive" target fund approach. They keep the fund heavier in equities throughout the timeline in comparison to Vanguard and Fidelity. I think I like this since I hopefully will also be funding a 401k through an employer someday, so this Roth IRA is more of a "backup retirement account" so I'm okay with being a little more risky with it when I'm 50-60 (at least now I say that). Besides, I could take the hit and withdraw earlier and invest it more conservatively in my 50-60s if I'm not okay with the fund's allocations then.
Is this expense ratio going to be a real killer? I know it will definitely add up over time, but maybe T Rowe Price's fund will also perform better? You just can't know for sure.
Or, I could wait another 6 months to save for a $3k account at Vanguard. But.... you know what I want you guys to say....
So what do you think?? Wait or go for it? Or... so other option?
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Tue Feb 22, 2011 2:52 am |
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KatherineLee88
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Thanks coaster - I found it.
quote:
Originally posted by coaster
Katherine, I think that making a decision like that on the basis of expense ratios is placing unwarranted weighting on that in your decision process. Yes, expense ratios affect performance, but what you want to look at is the NET .... the PERFORMANCE of the fund against its peers, because that already takes into account the expense ratio. Morningstar's ratings take that all into account for you. Choosing an inferior fund based on lower expense ratios is a poor choice, IMO.
That's what I figured. I guess I already knew the answer. I just wanted someone else to confirm that I was being logical/rational about it.
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Tue Feb 22, 2011 2:42 pm |
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