Wanted: Savvy retirement advice for a struggling youth
December 2, 2013 9:16 AM   Subscribe

If I live until retirement age, I don't want to be broke. I am 24 and I want to start saving for retirement now, but I’m unsure how to go about it. I’ve heard good things about Vanguard, but I’m looking for some personal anecdotes and solid advice on how to go about this.

I make 28k as a legal assistant and have been in this job for approximately 8 months. In July I will qualify for a 401k program, but as it is uncertain if I will continue at this job after that point I’m curious if I should open a Roth IRA instead. I am 24 and I want to start saving for retirement now, but I’m unsure how to go about it. I’ve heard good things about Vanguard, but I’m looking for some personal anecdotes and solid advice on how to go about this.

Currently I have a checking and savings with a traditional brick and mortar bank in my area and an online savings account with Barclays. I have approximately 4k in the Barclays OSA and I have $100 automatically going to that account every paycheck as well as throwing more into the account as I am able. (Goal is to have between 8-10k in that account by August.) I have no school debt, as I've paid my own way. I have a small car loan (about $5,000 left on it) and a very small monthly payment. I recently applied for a credit card, but only to help establish credit. I have a full time job as a legal assistant and a part time job as a domestic violence counselor weekends/nights and I am working on three classes until I can finally have that damn BA.

I have had the Barclays account for about 4 ½ months and was putting away roughly half of my income each month, but between holidays and trying to pay for school and car insurance I haven’t been able to do that lately. I live with my parents, I don’t go out at all unless it is to the library or gym at Uni and my personal expenses consist of health/medication, school expenses, phone bill and helping pay for groceries and other bills at home. I recently spent some money to replace my eight year old laptop and get some work done on my vehicle, so I think those expenses were justified. In short, I live pretty damn frugally and am a bit of a workaholic.

Should I take a grand out of my OSA and open a Roth IRA? Should I just keep doing what I’m doing and wait for the right opportunity? I need something I can just set up like an automatic deposit and forget about, because between a full time job, a part time job, and attempting to finish my BA I’m stretched extremely thin mentally. I've done some research and talked to my office manager about how the 401K works once I qualify. Apparently I get to choose the funds I invest in and can choose my own financial advisor. I find all this fascinating, but I need to start NOW and I don't have a lot of time to invest in muddling this all out or scheduling meetings with potential advisors. So can you help me out and point me in a good direction? I need advice my dear mefites!
posted by Driven to Work & Money (17 answers total) 19 users marked this as a favorite
 
I started a 403(b) with Vanguard through my job when I was 23 when it became available. I set up a percentage of my paycheck to be deposited every paycheck, and I picked the closest Target Date Fund for my age group. Vanguard has been really responsive and helpful every time I've met with their representatives, and the online system is very easy to use. If your job offers a 401 match and if you will be there, then absolutely do that. If you would like to also open a Roth IRA before that, it seems reasonable. I would speak with a Vanguard representative to see what they suggest and what their options are, given your age and the amount of money being invested. I think their fees have been really reasonable, but you can also look at different packages from other companies.
posted by jetlagaddict at 9:28 AM on December 2, 2013


Does the 401k get any company matching funds? If so, definitely contribute up to the max of the match, if you can (i.e. if they'll match up to 5%, contribute 5%). Vanguard has some great Target Retirement funds- you pick the fund projected to when you turn 65 or so, and they'll automatically update your asset allocation for you as years go on, saving you the trouble of having to do it yourself. All you have to do is contribute and not touch the money (at all, ever, ESPECIALLY if you're feeling nervous).

As for opening a Roth, I'll be curious to hear what others think; given your modest budget for investment at this time, I think you should probably focus on the 401k, and leave the RothIRA for when you have a little more to contribute. The big difference is the tax setup- contributions to a 401k come out of your paycheck pre-tax, and any contributions you make in the Roth are post-tax.
posted by ThePinkSuperhero at 9:30 AM on December 2, 2013 [1 favorite]


It sounds like you're doing all the right things. Just the fact that you're doing any long-term financial planning at 24 puts you so far ahead of the game compared to most people. So congrats on that!

Will your employer be matching any funds? Many (larger) employers will match your funds up to the first few % of your salary. For example, up to the first 5% of your salary that you contribute to the employer-sponsored retirement plan, they will deposit an additional 5%. If your employer does this, even only 1 or 2%, or only for half of what you elect to contribute, it's basically free money. In that case, definitely go with that plan, up to the maximum match amount.

It doesn't matter that you won't be working there forever - 401k accounts can be easily rolled into your next retirement plan if you want to keep your retirement funds consolidated.

If there's no match, or you want to save more than what you end up choosing for the 401k, the Roth is definitely a good way to go. You don't make much now, so your taxes aren't high. Presumably you will gradually move into a higher tax bracket (not to mention tax rates themselves), so it's advantageous to go the Roth route. Vanguard is highly recommended by reviewers online, as they have some of the lowest fees. And you can definitely do auto deposits to make it easy!
posted by trivia genius at 9:31 AM on December 2, 2013 [1 favorite]


If the interest rate on your car loan is more than zero, pay that off first. That's basically guaranteed free money, since you're saving on interest. You want to pay it off as soon as possible. I'd do that before worrying about investing. Once you've done that...

Does your company match any of the funds you'd put into a 401(k)? If they do, consider funding the 401(k) up to the amount necessary to get the maximum match, because that's free money. If not, or if you put that much in and then still have money left over, open the Roth IRA.

Whatever vehicle you choose, given your young age and the fact that you won't need the money for many decades, choose index funds. Vanguard (and many other providers) has what they call a "target retirement date fund," which means that you tell them what year you want to retire (for you 40-45 years from now), and then they invest in funds that are the right level of risk for your age (riskier when you're young and have time to make up for losses, less risky when you get closer to retirement age). Do not invest in any actively managed funds; over time, they usually do worse than index funds. You don't really need a financial advisor to do this.

Your investing goals are pretty simple. You want to put money away and not touch it for a few decades. You can do this on your own, and it doesn't need to be complicated or stress-inducing. But think about other goals you might have. Are you planning to move out on your own any time soon? Set up separate savings for that. Do you have an emergency fund so that holidays and insurance and such don't mess up your savings goals? I aim to have 6 months of expenses (not salary, but the amount I actually need in order to house, feed, clothe, etc. myself for 6 months) in a savings account I can access immediately. If you lost your job today, how much money would you need to have saved to pay tuition, food, expenses, etc. for 6 months. Set that aside in a savings account. If you start thinking broadly about your financial goals, it will be clearer how to best save for your various future needs.

But first, pay off your interest-bearing debt. Because that's costing you money every month, and unless your rate is near-zero, you'll get a better guaranteed rate of return paying that off than you would in any investment.
posted by decathecting at 9:32 AM on December 2, 2013 [2 favorites]


Congratulations for starting so early. Here are a few key considerations for financial well being.

1) Low cost index investing - Vanguard is pretty reasonable
2) Pay yourself first. If you save 10% of your income in a reasonably conservative vehicle for 40 years you are going to be just fine
3) Always live on less than you make
4) The only debt you should take on is a mortgage
5) Any time you have the opportunity to receive matching funds, do so. Period.
6) Your personal taxation and income situations are unknowable, so putting 50% in a roth and other retirement vehicle is perfectly reasonable

Honestly, with your time window if you follow the above, you are very very likely to retire wealthy.

Finally, target retirement date funds are pretty weak for people with a 40 year retirement date. I would not even think about that until I was maybe 10 years short of retirement. One of the big issues with them is they are not formulated to include all of your fixed income (government retirement such as social security) so invariably they are overweighted towards fixed income. This is not just my contention, John Bogle says the same thing.
posted by jcworth at 9:48 AM on December 2, 2013 [1 favorite]


Vanguard is a perfectly cromulent broker, as is Fidelity, my broker.

I think that a Roth IRA is a fantastic way to build wealth, tax free. Since you put post-tax funds into it, you don't have to pay taxes when you withdraw from it.

Versus a 401(k) where you put pre-tax money into it, and pay taxes when you start to withdraw in your golden years.

I would only contribute to a 401(k) if there is an employer match. Typically 3% to 6% of your total pay. If there isn't an employer match, although you're not saving on your taxes now, a Roth IRA is so great, that I'd sacrifice that, since your money grows tax-free after your contribution.

As for which investment vehicle. That's another nod to a Roth IRA. Your employer will have a limited number of funds for you to invest in. A Target Fund (Pick your year and it will automatically re-allocate throughout the life of the fund) is fine. Most of the time though, I find the number of funds to select from unattractive (I make due with an S&P fund, but it galls me to pay management fees.)


I'm more aggressive, I like Index Stock Funds/Exchange Traded Funds and my choice is S&P. It's historically been the best return over the long haul, but I'll admit, it can be nerve-wracking if you're risk-adverse. You have to be willing to ride out market downturns over years. It worked out great for me. Kept my money right where it was and kept on investing. I've regained all my losses and added quite a bit to my nest egg. I'm about 25 years from cashing out, so I'll start getting more conservative as that day approaches. You don't want to be stuck holding the bag if the market tanks in your seventies.

At any rate, ask any and all questions you may have when you set everything up with your brokerage firm. If you don't understand something, don't put your money in it.

You don't want any insurance or an annuity at this point. The exception is disability insurance if your employer doesn't cover it.

You are in an excellent postion, one I would have envied, if I had two-brain cells to rub together at your age. (I was a spender.)
posted by Ruthless Bunny at 9:49 AM on December 2, 2013


Your investing goals are pretty simple. You want to put money away and not touch it for a few decades. You can do this on your own, and it doesn't need to be complicated or stress-inducing. But think about other goals you might have. Are you planning to move out on your own any time soon? Set up separate savings for that. Do you have an emergency fund so that holidays and insurance and such don't mess up your savings goals? I aim to have 6 months of expenses (not salary, but the amount I actually need in order to house, feed, clothe, etc. myself for 6 months) in a savings account I can access immediately. If you lost your job today, how much money would you need to have saved to pay tuition, food, expenses, etc. for 6 months. Set that aside in a savings account. If you start thinking broadly about your financial goals, it will be clearer how to best save for your various future needs. - decathecting

Just to be clear, the entire reason I am at home is because I'm trying to save money. My living situation is highly stressful, I have no social life to speak of and I work constantly. I'm doing this to save money so that someday I can get out. I started the Barclays OSA for this purpose. I don't feel like I can even think of getting out until I have 10k saved. Should I open another account and start putting money into that as a strictly emergency fund for things like insurance payments, car repair and tuition and such? That's kind of how I treat my current savings account at the brick and mortar bank. It usually has about 2k in it and immediately after I take any money out for something I put it back with the next paycheck.

Also, I will have matching form my employer for a 401k when I qualify in July. It is a 3% to 4% I believe. But maybe I don't understand. If I start a 401k at this current job and then I leave, don't I just roll over that 401k into an Roth? So say I'm at this job for another 6 months after I qualify and I put in the required amount for employee matching, I don't get the matching employer money until I am fully vested (anywhere from 5 to 8 years). Doesn't that mean I have to stay at the employer for 5 years to get any of that money?
posted by Driven at 10:04 AM on December 2, 2013


Driven: "Should I open another account and start putting money into that as a strictly emergency fund for things like insurance payments, car repair and tuition and such? That's kind of how I treat my current savings account at the brick and mortar bank. It usually has about 2k in it and immediately after I take any money out for something I put it back with the next paycheck. "

Yes, I would open another account as a strictly emergency fund. What happens if you have an emergency before the next paycheck?

Just a data point, but my emergency fund has been untouched since I filled it over a year ago (knock on wood).

You might not need as much as 6 months of living expenses— some retirement accounts let you withdraw a percent of the money penalty-free precisely for emergency situations.

Driven: "Doesn't that mean I have to stay at the employer for 5 years to get any of that money?"

Correct. If you have no intention of staying for 5 years, then the employer match is meaningless.

Just to be crystal clear, if you invest $100 today and leave the company tomorrow, you'll still be able to roll over the $100 principal investment. You just won't get any match.
posted by yaymukund at 10:25 AM on December 2, 2013


Nthing open a Roth IRA every year you don't earn too much to qualify for one, and fund it to the hilt with equities.

Don't pay for a financial advisor when you can get a better one for free: go to your local library and check out I Will Teach You To Be Rich by Ramit Sethi. He's the only one out there who really understands the needs of an investor your age. You can skip to his chapter on how to automate.

Time is on your side, you'll do fine. Just make sure you always have enough "real" health and disability insurance so you can avoid bankruptcy, and don't marry someone who will ruin your credit or ever cause you to have to divide all of your hard-earned assets in half. Good luck!
posted by hush at 10:50 AM on December 2, 2013 [3 favorites]


Suze Orman just said on her show that investing $250 in a Roth IRA every month from age 25 - 67 (as opposed to from age 35-67) will net you something like $600k more for only $30k more in actual cash output. If you can swing it, I would. I'm 36 and started late and regret it.
posted by getawaysticks at 10:53 AM on December 2, 2013


My living situation is highly stressful, I have no social life to speak of and I work constantly. I'm doing this to save money so that someday I can get out.

It is good to save for retirement, but putting money in a retirement account is not going to get you out of living with your parents. Think about what your actual goals are here. Retiring comfortably is an admirable goal and something worth considering, but it may be worth delaying that to have a comfortable life in your 20's and 30's.

I am 32 and I max out a 401k contribution, but I have my own house and am otherwise fairly comfortable in my life already. If my options were either afford my own place and give up contributing to my 401k, or keep the 401k contribution and move in with my parents, I would stop my 401k contribution without a second thought. Your life in your 60's and 70's in not any more important than your life in your 20's and 30's.
posted by tylerkaraszewski at 11:03 AM on December 2, 2013 [2 favorites]


I'm also 24, by the way, and heartily second hush's recommendation of Ramit Sethi's I Will Teach You To Be Rich. Don't let the name put you off. If you want a flavor of the book, he has a great blog:

The world's easiest guide to understanding retirement accounts
posted by yaymukund at 11:08 AM on December 2, 2013 [1 favorite]


My living situation is highly stressful, I have no social life to speak of and I work constantly. I'm doing this to save money so that someday I can get out.

I'm a little worried that the retirement stressing might be a really roundabout (although eventually positive!), form of procrastination/displacement. It is about the only form of financial planning you could be doing at the moment that will not change your current situation at all. Contribute to retirement, but don't max it yet, or over plan it too much.

Sort out your Emergency fund first.

Make sure you have money to fund bond for rent etc, on top of your emergency fund.

Start looking at what your housing situation will be when you move out. Get an idea of prices, good deals etc. If you hear about a bargain (house sitting, rent controlled apartment needing a housemate etc), you'll be ready to take it.
posted by Elysum at 2:20 PM on December 2, 2013


You might really enjoy the blog Mr. Money Mustache.

I used to work for an independent broker, and will nth Vanguard: they don't charge you as many fees as others do (say, ING) because they don't have their own brokers automatically attached to your account. If you need advice, get a fee-for-service financial advisor; no sense paying one a % every month if you don't use the service (and for what you're doing, you'll be fine with books + metafilter advice).
posted by jrobin276 at 2:24 PM on December 2, 2013


In regards to emergency fund:

My 4k and growing in my Barclays OSA is my account to put money in hopes of getting out. But I don't feel comfortable making a leap until I have 10k in that account and at least one year under my belt in this current position. The reasoning is two fold: I think it looks bad on my resume to leave my first salaried position before putting in a year. (Previous two years spent at a non-profit on a stipend. Personally satisfying but couldn't live on what I was paid.) The other part being that I won't leave my current position until I can find another position. (Look for a job while you have a job.) Should I open another OSA for strictly 'emergency funds' rather than my 'moving on with life eventually' fund that my current OSA is earmarked for?
posted by Driven at 2:34 PM on December 2, 2013


Most employers have a vesting schedule rather than a cliff. So you'd gain a percentage of your match each year of service. So if you vest in 4 years, and get a 100% match on four percent, you'd be 25% vested immediately (in July you'll have worked there one year), with the other 75% disappearing if you were to quit that day.

So you'd still get free money. Just not as much.

When rolling over, you would automatically roll it into an IRA. A Roth IRA is a type of account that you'd have to specify and satisfy the taxes associated with the conversion.

That said, I would certainly look into Elysum's suggestion that retirement is something of a red herring. Your anxiety is on par with someone about ten years older with twice as much debt. I would suggest loosening up a bit on your anxiety regarding retirement and savings, and instead focus more on finding a sustainable career, social life and living situation.

Until you graduate college, you are still in the dis-savings part of your life cycle. You're graduating soon with very little debt, so your entire savings cycle is set aside for retirement unlike a majority of folks who need to pay off student loans or consumer debt associated with early low paying jobs.

Also, once you graduate, don't feel the need to stick around. Two years in non-profit, and then a legal assistant job while you finish your degree is definitely understandable to anyone who is interviewing you.
posted by politikitty at 5:11 PM on December 2, 2013


If your OSA has a delay to get cash in hand, you may want to beef up your checking account a little and use that as an emergency fund. I'm talking like house burned down and you need to buy clothing and food NOW type emergencies or, you know bail money. It's a good thing to have some cash readily available at an ATM and some online savings don't have that convenience to serve as an emergency fund.
I think once eligible for the 401k, you should put in just what your employer matches, but not max it out. You should be principally saving at this point to get out of your parent's house. Once you're out on your own and stable, then you can start throwing money at a 401 k above what your employer matches. trying to get anywhere near maxing it out though is going to be a severe lifestyle crunch at 28k, and probably not worth it.

Most people need to have a more "long view" approach financially, but it sounds like you might need just a slightly more "i could die tomorrow" thrown in, make sure you live a little.
posted by WeekendJen at 6:51 PM on December 2, 2013 [1 favorite]


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