I finally sat down and talked to my financial adviser yesterday (fancy speak for my best friend from high school who is a CFA), and he did not react well to the news that I’m not saving for retirement. The conversation ended with me opening a Roth IRA at Fidelity, and a couple people asked me questions about it on Twitter, so I thought I’d explain my process a little bit.
Here’s the tricky thing about all financial guides directed to people in their twenties. They tell you how to eliminate the credit card debt you inevitably piled up in college buying big macs and they teach you to start saving money towards a house. They tell you to contribute whatever is left to your retirement account, preferably a 401(k) your employer matches. (I have read this post on numerous personal finance blogs, but I’m open to reading other posts that say different things.)
I grew up in a relatively affluent area, and as such, I know a fair number of people in their twenties who are a) debt free and b) living comfortably. Some of them have the luxury of living in a house their parent’s own, rent-free, some of them received an inheritance or a significant amount of money as a graduation present, some of them have simply been working since they were 16 and have saved a significant amount of money. All of this is to say, there is very little advice for a person who is not currently in debt, and who either has a house, or has enough money to a house without needing to save for one, or has no interest in having a house.
There is a conception that has been promulgated recently among some of my friends that rich kids know what they are doing when it comes to money. The truth is they don’t, because they’ve never really had to worry about it. So let’s start with the very best advice I’ve received all year: retirement savings.
From what my high school friend tells me, there are basically three retirement options – an IRA, a Roth IRA, and a 401(k). The difference between a Roth IRA and an IRA is that an IRA is taxed when you take the money out and a Roth IRA is that it is taxed when you put the money in. So if you are in a lower tax bracket now than you plan to be when you retire, a Roth IRA is the way to go. (This is how it was explained to me. Please please please do your own research. I am not giving you financial advice.)
A Roth IRA has income limits, which I am currently well below. So a Roth IRA seemed like a no-brainer – so there are two remaining questions: where, and how much money do you put in?
There are a number of investment companies out there that do retirement accounts. I went with Fidelity because my friend recommended it, based on the fact that I could invest with the S&P for free (I have zero understanding of what this actually means, expect a post on investment shortly once I’ve learned more about it). I decided to go with Fidelity for the same reason that my parents both got iPhones. It’s much easier to help somebody with a problem when you understand it, so since my friend invests with Fidelity, I can go to him for help in the future and he will understand it better than if I went with Vanguard (my second choice, as it’s where my husband’s accounts are.)
The second question – how much money do you put in? My friend’s advice was that once I/we have a six-month emergency fund in savings, I should be maxing out my retirement funds. You can put in $5,000 a year. The minimum for Fidelity is $2,500. The minimum for other companies is supposedly lower (one tweep said her minimum was $1,500 per year.) The thing about retirement funds is it is incredibly hard to play catchup if say, you don’t start saving for retirement until you are 30 (this was the lecture I got today), but if you start saving now, even if it’s not very much, it will give you a boost for the future. As a person who does not make much money currently, I know that I cannot count on having a large amount of social security earnings (if I can count on any), so saving for my future makes me feel better about it.
In case you are wondering whether you really need to save for your retirement, nursing homes cost about $7,000 a month. Does anyone else have any tips or thoughts on investing and retirement funds?