Saving & Investing

I was talking to Lisa one day (we talk a lot), and she said, “Do you ever feel like you’re the only one saving for retirement?” And, it’s true. It doesn’t seem to be a high-priority for many people our age (late-ish twenties). Well, friends, that is not the money hip mama way, and let me tell you why.

Time is your biggest ally. You may not have tons of money to invest while you’re young, but you do have lots of time for it to work for you. For example, say you saved $275 a month towards your retirement starting at age 25. If you get a 10-percent return (completely reasonable given our time frame) and you’ll have over $1 million at age 60. Cool, eh? But say you start saving 15 years later, at age 40. If you want $1 million by the time you’re 60 you’re going to need to save around $1,320 a month given the same rate of return. Yikes. Try playing around with this cool calculator from bankrate.com to see just how HUGE an impact starting early makes.

You say, “That’s great, but I don’t have any money.” We say, “Just open an account. Do it today.” People always seem to think that they need a bunch of extra cash floating around to have a retirement account. Not true. Just the mere act of opening an account is a huge step, regardless of how much money is in it. Here’s what we want you to do:

  • Open up a rainy day fund—because it’ll save your bacon when you need it and give you peace of mind the days you don’t. We like CapitalOne 360. Shoot to get first $1,000 at minimum. Then aim for enough to cover three to six months of expenses (gold star if you get a year’s worth of expenses in there). Set up an automatic monthly deposit with an amount that fits into your budget.
  • Open up a Roth IRA. (More on what a Roth account is here.) Mine is with Fidelity. You don’t get a tax deduction for contributing to a Roth (meaning you use “after-tax dollars” to contribute to it), so you don’t have to pay tax on the distributions. Plus, it grows in your account tax free. Set up an automatic monthly deposit with an amount that fits into your budget (15 percent if you can swing it).
  • Open a 529 savings plan. Yay, you just had a baby! Time to start saving for college! (Trust me, it’s not crazy—you’ll thank us when they graduate high school.) Super easy to open. Mine is also with Fidelity. Your savings grow tax-free and the distributions are also tax free as long as you use them for valid education expenses. You can also change the beneficiary to another child. Use the calculator to get an idea of how much you’ll need to save, and look at your budget to see what is feasible. But always remember, anything is better than nothing. And, of course, set up an automatic deposit.
Check out our saving and investing tutorial if you want a refresher course on what all the different kinds of investments you can make are.

17 comments:

  1. This is so helpful--I am one of those late twenty-somethings wondering what we should be doing exactly to save for later. Great advice!

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    1. Made my day! Thanks for commenting!

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  2. What happens if I invest in a 529 plan, but my only child chooses not to go to college? Is that money recoverable?

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    1. Stay tuned for our upcoming post on 529 plans that will cover them a bit more in-depth and address this issue! Thanks for the question!

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  3. I'm starting to see the light! The future is not so hazy... Thanks for the clear and easy to understand info!

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  4. Where in the world do you find a savings account with a 10% APR?

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    1. I agree that is a mythical creature. Our savings account is under 1% right now! I was referring to a retirement account invested in mutual funds held for the long haul.

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  5. Saving for retirement is so important!!
    For all those mamas who don't know how to find extra cash to tuck away, just try switching to online shopping! It's so easy peasy to search and find the best deals on stuff by using the internet, and then you can let the extra money accumulate in a savings account.

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    1. I'm BIG into the online shopping, for three reasons: (1) It's nice to be able to price-shop and read reviews (2) I'm 6 feet tall and have to order my clothes online anyway (3) I have a little baby who naps 3-4x a day so it's hard to get out. Thanks for the tip!

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  6. Thanks, Lauren. I also feel like I'm the only one who is saving for retirement (I've been maxing out my TSP every year since I started working), so it's nice to know there are a few other responsible adults in our age group out there. Since I have a TSP (like a 401k) through my employer (the government), into which I put about $17,500 a year, should I also open a Roth IRA? Or is one retirement investment account sufficient? Also, there are a whole bunch of different funds that I can choose from for investing my TSP money, but I have no idea how to differentiate between them or how to know which is the best option. Do you have any advice?

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    1. Hey! You bring up a couple of good points. I should probably revise the article to say that you should first invest in your company's 401(k) plan first if they have a decent matching program. If they don't, at that point I would consider moving some of your contribution to a Roth if you anticipate that you are at a lower tax bracket currently than you will be when withdrawing the funds. I feel like you are ahead of 99% of people with your current contribution level, but you can check out a couple of retirement calculators (http://money.msn.com/retirement/retirement-calculator.aspx), compare to 15% income to retirement rule of thumb, or to your current living expenses (http://www.forbes.com/sites/davidmarotta/2012/10/01/how-much-should-i-have-saved-toward-retirement/) to see if you want to save any more. As far as picking a fund, did the guide they gave you have any lifecycle funds that automatically move from more volatile investments at the beginning to more stable funds closer to retirement (http://money.cnn.com/retirement/guide/investing_mutualfunds.moneymag/index12.htm?iid=EL)-- (I don't appreciate their use of the word "investment-phobe" here). That would probably be a good topic for another post, since I frankly need to research/learn more about that too. Hope you and David are doing well!

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    3. Hi Lauren! Thanks so much - this is great advice. It's nice to know I'm at least on the right track. DoS matches our contributions up to 5% of income, but I'm not sure how good that is. To reach the maximum, I invest roughly 25% of my gross income, so with matching it's 30%. The TSP does offer several lifecycle funds, and I am currently investing most of my contributions in the L 2040 fund, since that is closest to my retirement date. There are a couple of other L funds, but they are shorter-term (2020 and 2030, I think). The other funds are G (government securities), F (purchases securities that exactly match the Barclays Capital U.S. Aggregate Bond Index), C (invests in the 500 large and mid-cap companies that comprise the Standard and Poor’s 500 Index), S (small capitalization stock - holds the securities that comprise the Dow Jones U.S. Completion Total Stock Market Index), and I (invests in securities that mirror the Morgan Stanley Capital International EAFE Index). Sorry if that's too much information. Honestly, I don't really know what any of it means. Hope you and your family are doing well, too! Can't wait to see photos of the new little one when s/he arrives!

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    4. Sorry for the super delayed reply! I think you're doing really well! (Granted, this is not my area of expertise.) I think their matching program is probably decent (not sure exactly what their match % is, but average is $0.50 per each $1 contributed for up to 6% of income-- at least according to Forbes two years ago). I think picking a lifecycle fund based on your projected retirement date is a great choice. The other funds you mention have different risk/reward profiles, and, in my opinion, the lifecycle fund uses those more appropriately based on your personal time horizon than, for example, putting all your money in a super conservative fund when you have the longest time to go before retirement. If the $17,500 is just to max out your IRS 401(k) contribution limit, but you reach the employer match limit before that point, it may be worth shifting the unmatched portion into a Roth IRA, but just something to think about if it applies. And again, just my thoughts, not professional advice here.

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  7. This is great advice. I decided to make change today and signed up for your budget boot-camp. I am starting very late in the saving game (i'm 46). I am one of those people who think they don't have enough funds to save because I am basically living check to check, but I am striving to change that. Thanks for posting this information. It is very helpful.

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    1. Thanks for your comment! I think living paycheck to paycheck and still making an effort to save is super admirable. I hope the Budget Bootcamp is helpful!

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