May 20, 2012

Roth IRA Versus 401(k): The Great 20-Something Debate

Written 4/5/11 for Minyanville.

 In my last post, I mentioned that saving is one of the first steps to take toward a financially secure future. Specifically, invest in a 401(k) if your company offers one.  The money goes in automatically pre-tax (you can even pretend it doesn’t exist), and usually the company matches a percentage of what you input. Any percentage you invest is better than nothing. Find out the max amount your company will match and aim for that. Or you can do a Roth IRA, with money that’s been taxed in your paycheck already. The max is $5K per year. You can also do a combination 401(k)/Roth IRA if you want to diversify and get fancy.


That makes it sound like I know what I’m talking about. The truth is that I have no idea how much I’m contributing to my 401(k). I spent a good fifteen minutes trying to find out on the company’s website to no avail. All I know is that I have one, I’m putting money into it, and that’s good.
I don’t know anything about a Roth IRA except that you invest money (up to $5K) that’s already been taxed as I said above. What does that even mean? And who in his or her 20’s has $5K lying around? Definitely not me.
So this week I’m looking at the difference between a 401(k) and a Roth IRA, the pros and cons of each, and then deciding how much I personally should be investing in my 401(k) (after calling to find out what percentage I already contribute. Homework, ugh.), and then figure out whether a Roth IRA is something I should do too. It’s not like 401(k) and Roth IRA are the only retirement fund options. There are tons of others, but these are the two I hear about most often.
Of course, it’s different for everyone, but hopefully my research will help you out and we can get beach chairs next to each other when we retire at 59.5.
Roth IRA is an investment account, in which you invest money that has already been taxed as part of your regular paycheck into stocks, bonds, index funds etc. It’s then managed by a brokerage firm. Easy enough.
Pros: The cool thing is that whatever you gain in there is tax-free when you take it out later in life because it was already taxed before you put the money in. If you can afford to put in the max $5K every year (that’s less than $100 a week or about $14 a day) and let’s say you’re 25, you will have $200K by the time you’re 65. But you’ll also have gains and interest, which have accumulated on your money over time.
Our 20-something financial guru Marc Bodinger says “If you take it seriously and contribute the max annually you should have a million by retirement.” There are also more investment options, like common stock, mutual funds, bonds, and ETFs, versus a 401(k), which may only offer mutual funds.
Cons: Your Roth IRA investment is not matched by your company. Like the 401(k) you have to leave the money in the account until retirement, or you’ll face penalties. There are some exceptions, but I suppose you could say it’s frowned upon. You can take out the original amount you invested if you need to without penalty. There’s a chart on Smart Money  that shows when you’ll face penalties and what the exceptions are.
How to invest in one: You have to call a broker (TD Ameritrade, Charles Schwab, your local bank, etc.) to open an account. You can’t just waltz over to HR tomorrow morning unfortunately. Some of them have a minimum amount you need to invest, so decide what you can invest and see who will work with you. If you’re going to put in $5K in a year, you just have to do it by April 18th. Then a new year starts. It’s probably best to direct deposit either from your paycheck or your bank account into the Roth IRA, so you actually invest in it and don’t forget. If $5K sounds like way too much because you’re paying student loans, rent, and hardly make anything, that’s okay. Just invest what you can. If it’s $100 a month, you’ll learn to live without it and you can rest assured that the money is growing for you and you don’t have to do much of anything. Make it goal to do this with your next raise or bonus or birthday money.
401(k): An investment company, such as Fidelity or Principal, manages 401(k) cash money. They will give you different options. There are some already set up and you can choose based on your age. Or you can pick your own options (stocks, mutual funds, international) to throw in the basket if you don’t like the pre-packaged choices. Obviously I have a pre-packaged choice, because I wouldn’t have a clue what to choose for myself.
Pros: With a 401(k) less of your income is taxed now, since the dollars go into the account pre-tax and then grow. You can deduct this investment from your taxable income, so really you’re saving money by saving. If your company matches the money you invest, that’s just free money for you. For example, if you invest $2,000 and your company has a 1:1 match, you really have $4,000. You can have the money taken right out of your paycheck, and all you have to do it talk to HR at your company. Oh, and if you leave your current job, you can just take your 401(k) with you. You don’t want to cash out until retirement, but the investments will roll over for you, even between investment companies.
Cons: You do pay taxes on your 401(k) dollars when you take the money out though in retirement. It counts as regular income tax that year. And if you log off of Facebook for five seconds so your career goes well, you’ll be in a higher tax bracket by then, so that will be a big tax year for you considering taxes are likely to increase in the next 40 years.
How to invest in one: Go to HR and ask for an application. Find out how much your company matches, if you have to be at your company for a certain amount of time before they match, or if you have to invest a certain percentage for them to match. Try to invest so you get the max amount matched by your company for free money!
So 401(k) or Roth IRA?
Marc says, Both. “We will need both upon retirement anyways. I’ll bet on that.”
Another young financially savvy attorney also says both. “You pay taxes with both. Bottom line. It’s just you pay taxes at different times. If you put your money in 401(k),  taxes could increase, then you’re paying more. If you put your money in Roth IRAs you lose out on the company matching your pay. My personal belief is that it’s never smart to have all of your money in one place.”
If your company doesn’t offer a 401(k) or match your contributions, it looks like a Roth IRA is a good alternative.
In any case, you have to do something. You can’t rely on social security or the government to take care of you in retirement. You have to plan ahead. If you open a 401(k), Roth IRA, both or something else, you’re giving yourself an advantage in terms of taxes, growing your money, and keeping your head above water. No one is saying it’s a fun time. It’s not like you get to take the money out and buy a new iPad every few months. But you’re saving for your future. Not only saving, but accumulating. And it’s not extra work once you set it up.
Start now though, because if you figure you’ll wait a few years until you make more money, you’re losing out on thousands that could be accumulating while you procrastinate and whine about not having money to save. It looks like the only way to get rich besides making a lot of money is investing in something that makes your dollars multiply. Money may not grow on trees, but it does grow in retirement accounts. Seems kind of like a magical no-brainer.
Choose Your Nest Egg Nest

Trusted Sources: Bankrate.com and iwillteachyoutoberich.com

20-Something Myth: “I Can’t Afford to Save”

Moving this over from my Minyanville blog. I don't have time to keep up with it, so it's being archived, sadly. This one was written 3/22/11

I’m a 26-year-old who’s been working in Manhattan as a media planner for four years. I manage budgets for a living, so you would think I’d have a clue about how to manage my own money by now.

Not so much.

I’m only just beginning to realize that I’m not in college anymore. I can’t call my parents to ask if they can pay half of my rent, like I did at Penn State. Just a couple months ago, my cell phone bill was finally transferred from my mother’s name to mine. I realize it’s ridiculous that she paid my bill for that long, but I wasn’t going to bring it up before she did.

So now I’m 100% financially independent, and I have no idea what I’m doing. My head spins and I start dozing off when I try to learn about stocks, retirement funds, and social security.

Still, my goal for 2011 is to figure out some sort of long-term investment strategy for myself, so I’m building a financially stable future, instead of just working to pay rent. As I embark on this wild adventure and talk to financially smarter people, I will keep you posted, so you can learn along with me.

Let’s say you just graduated from college, or you started your first job (congrats on actually finding one), or maybe you’ve been working for a few years, but you’re barely living paycheck to paycheck. You feel like you don’t have the time or patience to invest, and you need every last cent to pay your rent, credit card bill, and college loans. You’re not alone.

I’m in the paycheck to paycheck boat, mostly because my rent is upwards of $1,000 a month in the New York City metro area. Once I pay rent, I’m almost drained for the following two weeks, so I use a credit card. Then with my next paycheck, I pay my credit card. If I happen to buy a trip to Vegas, an expensive birthday gift for my beloved boyfriend, or pay a huge heating bill, I’m in debt for another month. It’s like being in a hamster wheel, and it’s not like we can just hop off.

However, we’re about solutions, not whining, so I talked to Marc Bodinger, a 20-something associate at a financial research firm and self-professed finance aficionado (a rare breed).

“The 2008 financial crisis has demoralized young investors (our age group) to the point where they would rather go shopping then prepare for a future without social security and pensions.”

Yes, but it’s so much more fun to shop!

“Every day we don’t start preparing is a loss when we’re older.”

Scary stuff, Marc.

“In order to invest, you need to save.”

Yes, the first step we need to take toward our futures in a sunny, cushy retirement community in Florida or at least that huge wedding reception we’re throwing for ourselves in the next two to five years begins with saving and/or paying off debt. If we don’t save, we’ll never get off the hamster wheel. And the hamster wheel is not a good place, so you do want to have an exit strategy.

My friends always say, “I can’t afford to save, because I have so many bills!” But in reality, you can’t afford NOT to save.

1. If you have credit card debt or you just bought a fancy watch you couldn’t afford but just had to have, your first priority is to pay it off. And not with another credit card! Sense: that makes none. The interest you pay on these things is like flushing money down the toilet. Interest is how credit card companies stay in business; they want you to be in debt. It makes them rich. Do your best to get rid of your balance. Then if you need me to swing by and cut your credit cards for you, let me know.

2. For college loans, do your research and consolidate to make sure you’re paying the lowest amount of interest possible. The good thing is that college loans are tax deductible. Still, the sooner you can catch up, the better. And when you do catch up, try to stay afloat.

3. Start an Excel spreadsheet and budget your expenses. If you know you’re going to a bar tonight and will probably spend $100 on drinks, food, a cab, and more drinks for some random cute girl, make sure you set that money aside. Don’t worry about it later, just be honest with yourself and prepare. Make a solid effort to live within your means. What do you think our grandparents did before credit cards were invented? I’m guessing they didn’t spend hundreds of dollars on bottle service at a trendy club or buy the latest record player. They only bought what they could afford. A credit card isn’t money. It’s imaginary money. It doesn’t exist until you pay your bill with actual cash you’ve earned. If you’re spending more than you make, get a second job.
Credit cards = Imaginary money

4. Have an emergency stash, a savings account, separate from your checking account. Don’t use it unless it’s actually an emergency, and spring break doesn’t count. Make it a point to put money in whenever you can (birthdays, bonuses, money you won in your office football pool etc.) You just never know what life is going to throw your way.

5. Invest in a 401(k) if your company offers one. The money goes in automatically pre-tax (you can even pretend it doesn’t exist), and usually the company matches a percentage of what you input. Any percentage you invest is better than nothing. Find out the max amount your company will match and aim for that. Or you can do a Roth IRA, with money that’s been taxed in your paycheck already. The max is $5K per year. You can also do a combination 401(k)/Roth IRA if you want to diversify and get fancy.

You’ll always have expenses, but saving, even if it’s only 3% in a 401(k) or 10% of each paycheck in a savings account to buy your first home, is extremely important, so no excuses.

“It’s difficult but it needs to be done because one day you’ll be 55 and you won’t have the time to play catch up. Saving a little everyday now will pay off,” Marc says.

Time is on our side for right now. We need to take advantage of being young and do everything we can for our near and distant futures. I don’t know about you, but I want to be sitting on the beach when I’m old, not in a cubicle.

March 16, 2012

My Failed Detox

I decided to detox after watching the documentary, Fat Sick and Nearly Dead on Netflix last Saturday night (cuz that's what you do when you're 27 apparently). That night I threw out a macaroon and Shaun got rid of his leftover pizza (by eating half of it) and we went grocery shopping for about 10 pounds of fruits and vegetables.

In the movie, it's all about juicing and drinking all of your meals for weeks, but these people were obese and really unhealthy. Since I didn't want to lose weight, just feel healthier, I did the Whole Living Action Plan (I still had the January issue lying around and remembered it). We eliminated alcohol, caffeine, gluten, added sugar, dairy, meat, processed food, and did I forget anything? Oh yes, happiness. Week 1, we're only allowed fruits, veggies, nuts, seeds and oils which seemed like a great idea at the time. Week 2 you add fish, lentils, soy, and beans and week 3 you can add back gluten free grains and eggs.

Day 1 was easy because it was a Sunday. We had a smoothie lunch (berries with water/ no sugar applesauce) and then some delicious homemade broccoli soup for dinner. I might've added a little chicken broth, but I didn't want to throw it out and it was already open. I also made a pretty avocado salad.

Photo from Whole Living by Bryan Gardner
Day 2 - massive headache, smoothie breakfast (berries/water), leftover salad lunch, banana maybe, coconut water, another soup dinner (this time Butternut Squash) with grilled mushrooms/peppers - my skin looked healthier but I was very tired - they said that would happen as toxins leave your body.

Day 3 - What they don't tell you is that toxins leave your body by violently beating their way out of your head. Smoothie breakfast (carrot juice with mangos/pineapple - 700% of your daily value of Vitamin A), apple snack (I might've added peanut butter this day because I just needed something - although even that has added sugar), salad lunch, finally strong enough to do yoga after 3 days of weakness, yet another soup dinner (broccoli again) with mushrooms/peppers on the grill again. Tried to make kale chips, didn't work out. Shaun admitted to drinking a can of Coke which is most definitely not allowed.

Day 4 - Do not feel like working - fruit smoothie in a to-go cup (carrot/mango), raw apple, salad lunch, mixed nuts snack (makes me feel sick possibly because the almonds were flavored and had a bunch of crap ingredients), drank 7 cups of water. Then had a team dinner, so kind of gave up on the all fruits/veggies thing. Ate 3 pieces of sushi, had a mushroom salad, and okay fine, a Bellini. It was nom.

Day 5 - By Thursday I mostly threw in the towel. Smoothie breakfast (berry/water) with apple, then for lunch I splurged and got chicken on my salad. It made me feel amazing. I don't even love chicken, but I really needed protein I guess. Then I had two Girl Scout cookies. hahaha After the gym, we went to our favorite Jewish deli and I had a pickle, mashed potatoes (hello carbs!!) and barley soup. AND another cookie. Best day ever!

I forgot I have to fit into my bridesmaid dress in a few weeks, so I figured I should stop starving. If I normally ate really unhealthy, I could see how the detox would be a good thing to teach me how to eat. But otherwise, it's just sort of torture and makes you miss things you never eat anyway. My problem is that I don't love food enough (I blogged about that already) and I never know what to eat so I just eat a lot of salad. It's really boring!

I started a food diary using My Fitness Pal on Wednesday, which is great for anyone because it shows you if you don't eat enough protein, carbs, etc. based on your height and weight and how much you want to lose (or maintain). It recalculates if you exercise. All in all, I recommend a cleanse if you really need to re-learn how and what to eat and have really bad habits (fast food, lots of red meat, pasta etc). If you're already a health nut, it's not necessary. However, a food diary is good for anyone, because now I can see which nutrients I'm lacking and maybe eat less sweets and processed foods. It makes you double think your choices if you have to enter it into an iPhone app... and you know what? I still haven't had Starbucks all week which is a major win for me.

Have you ever done a fast or detox? What do you think about them?