For the first time in seven years I’m shining on my contributions to a Roth IRA. The $6,500 that would have gone into that account will go into savings instead.
That doesn’t mean I’m ignoring retirement. I’m just changing the way I do it. The reason may not make 100 percent financial sense, but it will make me feel better.
Here’s why.
My liquid savings have dipped in the past few months, due to having taken time off to write and promote my online writing course, to attend a couple of conferences (and speak at one), and to visit my daughter. The old me would have kept up the same writing pace while doing those other things.
But I’m no longer the old me. I’m the Older Me, a person with health issues that prevent my running from pillar to post from dawn until midnight. I’m a person who wants to enjoy her life vs. lurching from deadline to deadline.
And I’m a person who likes having a decent amount of money in the bank. For starters, I want a robust emergency fund – which should be anywhere from three to 12 months’ worth of expenses (depending on which PF guru you believe).
In her book “The Real Cost of Living: Making the Best Choices For You, Your Life and Your Money,” financial expert Carmen Wong Ulrich spelled out why we need liquid savings.
Having a healthy EF can “prevent you from losing your home…losing your way of life, or even just falling behind into credit card debt that will eat away at your hard-earned dollars for years,” she says.
“Peace of mind is priceless.”
Less room for error
Ulrich believes we should have eight months’ worth of expenses stashed. Right now I’ve got that much and then some, for two reasons:
- My basic expenses are fairly low, and
- I made it a point to save when I was earning at a higher rate.
But I want more savings. If something were to keep me from working much (or at all) for a year, I might wind up running through everything I had.
Then what? I’m 57 years old and don’t have as much time to make up those savings as a 20- or 30-something in the same situation.
I’m blessed to have a 401(k) from my newspapering days plus a small pension and whatever I will get from Social Security. My fondest wish is not to apply for Social or take any money out of the retirement accounts until I absolutely must. That’s because I want to leave as much as I can to my daughter, who got a late start saving for her own retirement due to disability and other issues.
So wouldn’t the smart money, as it were, be on plumping up the Roth as I edge closer to retirement? Probably. But sometimes what makes sense on paper gives me massive anxiety in real time.
What works for me
That’s not the way I want to live. In fact, anxiety can make it a lot harder to do my job, especially since freelancing means constantly being on the lookout for more work. That’s hard for me to do when I’m so anxious I want to curl up like a doodlebug under a garden bench.
To calm my nerves, I need to see a growing savings-account balance. That’s true even though the interest rate is paltry compared to what that money could do in my Roth IRA account. (Thanks, Vanguard!)
It’s not as though I’m completely ignoring retirement funding. My LLC is currently funneling $3,600 into a SEP-IRA. If I start bringing in more money, then I’ll increase the contribution before I give myself a higher salary.
And if my company brings in a lot more money? I’ll probably still beef up liquid savings as well as contribute to the Roth. Because peace of mind is priceless.
Tell me, readers: Do you make any money decisions that don’t quite square up with accepted PF wisdom? If so, why? And how is that working out so far?
Related reading:
- Toward a care-free retirement
- Stealth savings with Digit
- Time is something we can’t do over
- 5 ways saving for retirement is like a marathon
Couldn’t you put money in a savings account in the Roth and take it out minus earnings in an emergency? You still have until next April to do that.
I was going to make the same comment. Then if you don’t need the money it is in a better place for the long term.
This is something I grapple with, too. There’s something calming about having money in liquid savings where you can get at it easily in an emergency. I am currently considering putting some of that EF into a Roth because in a true emergency, I could take out what I put in without penalty. I know my Roth performs much better than the savings…. But it’s that “feeling” that holds me back.
Definitely! A lot of money goes towards paying of my student loans, but an equal amount also goes towards my IRA every month. Being 25 means that I have a lot of time to let my money grow, and that with a low interest on those loans, in my mind, everything is peachy.
Compound interest is your new BFF.
I do not have an IRA nor a Roth. I have a pension, social security, and I put away $500 a month into savings.
Of course, if the financial system crumbles, none of us will have a thing. Now isn’t that a happy thought?
We paid off our mortgage. Not the recommendation at the time, but peace of mind is a lovely thing. We are also living off his pension, my small pension and moderate Social Security. Not touching the retirement accounts until I have to! Some of the savings is going in to our “provident living” stash so we can still eat of the whole mess collapses.
Yep. About four or five years ago DF used some retirement monies to “retire” the last of his mortgage. Against financial advice, of course, but he’s been so happy living in a paid-for dwelling that he doesn’t care. Besides, he’s been living frugally ever since and has put the money back. Now he’s working on building his savings even higher.
Can’t help lovin’ that man…
Whole Life Policy! My husband & I got a term policy when we first got married and then about 8 years ago we converted it to a whole life policy. I love the security that if you pay for it you have it until 92 years of age. If health problems come up you are still covered and at the same rate as in your 40’s for us. Right or wrong, it is my logic 🙂
Every time one of those bank tellers with a financial product to push sees my account they all try to get me to take the money out of my checking/savings and move it somewhere less liquid. My answer is always no. I like having a reasonable stash that I can get to that isn’t tied up for months or needs to be ransomed with a penalty. When you have to pay a penalty to get to your own money it doesn’t feel like your money.
This! I have money tied up in a Roth and a 401(k) and that’s fine — I like the idea of something for later on. But putting cash into a CD doesn’t make sense right now, and I’d like to have enough liquid funds to get by should something go wrong.
Yah, me too! The last time one of them gave me a pitch for their grandiose 1.1% savings instruments, I looked at him and said, “You DO understand, don’t you, that this money is what I have to live on, and all I have to live on, for the next 12 months?” That shut him up. For the nonce.
I move 12 months’ worth of living expenses from investments to the credit union each January. Drives ’em crazy!
I’ll be “broke” again in December…but replacing the water heater costs almost a grand, the money is there, right now, to pay for it.
Okay, I have to say it: Taking the money out to fix the water heater improves your liquidity. 😉
Puns! Never apologize, never explain.
LOL—Donna, your quick wit never ceases to amaze me, or give me my chuckle of the day!
Happy to amuse!
“Tell me, readers: Do you make any money decisions that don’t quite square up with accepted PF wisdom? If so, why? And how is that working out so far?”
Yep. Recently, I stopped my 401k contributions & as a result I’ve lost out on the 6% company match. I know it’s a lot of wasted money, but I decided to funnel the $ elsewhere. I had slimmed down my budget substantially & still wasn’t coming up with enough fundage for a sizable snowball. So with the freed up 401k funds, I’ve been putting all of that $ towards debt. So far, it’s working VERY well! I’m set to pay off category 1 (all medical, dental, divorce debt) by Jan 2016, possibly as soon as October 2015. Once that’s done, I’ll immediately start my contributions back up since I’ll have enough $ for a snowball on my next category of debt (student loans, car). It’s been a sobering experience, knowing that I’m losing out on so much free money, but I know it’s what’s best for me.
A six percent company match…Wow. That’s quite a bennie! But sometimes what’s best for an individual flies in the face of conventional wisdom.
The last 10 years have been a very unusual trip for me, one that would have been unthinkable back when I was a full-time newspaper journalist. The idea of not having a full-time job with company-paid benefits just wouldn’t have flown back then.
So far, so good. Yes, I’m losing out because I have to pay for my own health insurance and I don’t get any kind of company match for retirement. But the benefits for me, at this stage of my life, outweigh the aggravations.
Thanks for reading, and I wish you luck getting back onto that 401(k) match as soon as possible.
Yea.. it’s a big perk! And I think losing out on that free $ is a big motivator to get myself out of this mess & to stay there! *fingers crossed* that I can start back up in October!
I have have occasionally made financial decisions based more on the emotional aspect than the pure dollars and cents of it. Most recently, I chose to cash out some investments for a new car purchase, even though the investments were earning more than the interest rate on a car loan. Why? Because it’s important to me not to have debt. I made the conscious decision that the lost investment income was worth it in terms of my emotional satisfaction, and I don’t regret that decision at all.
That’s what was behind DF’s decision: He’d rather have a paid-for house because whose job is really safe in this economy? He’d always have a place to live and not have to fret about making mortgage payments.
As noted, he’s replaced the money and is now challenging himself to build his savings considerably. Since we live a pretty low-maintenance life and we’ve been blessed with general good health, we’re both been focusing on beefing up our (separate) accounts. When it comes to what you call “emotional satisfaction,” no regrets at all.
Thanks for reading, and for leaving a comment.
One thing I’ve done that probably went against the advice then being given is that I put a lot of money into my 401K at work when the market was tanking, and steadily increased it while the market was down, or only somewhat improved. When the bull market seemed assured, I stopped contributing. But my 401K has continued to grow along with the market, and I pay little commission (thanks to Vanguard). I am waiting out what I see as an overvalued market, but when it goes down and stays there, I will start putting money into that Roth 401K and Roth IRA again. Ideally I would have continued to contribute to the 401k at work all along, but, instead have been investing in collectibles. That may or may not turn out well; I don’t know yet.
At 59.5 years of age, you can withdraw out of your ROTH IRA without any penalties. Granted, yes, you can take $$ out after five years invested also (just the principal not the interest). But all around, a ROTH IRA is the last, greatest retirement saving vehicle in any town. I feel secure with my laddered ROTH IRA CD’s that should an emergency hit me, I can withdraw whatever I need, instantly and without penalties or taxes due. Plus the CD’s are FDIC insured. Additionally, IRA’s and other retirement accounts are safe from lawsuits, bankruptcy and collection grabs. Even from the government.How much more security in life do you need?
You keep touting your boyfriends mortgage payoff and how safe he feels having a paid off roof over his head. What about you? Is your name on the deed? What if you two lovebirds break up? Where are you going to go in cold Alaska?
You also say you want to leave money to your daughter after you pass, which is very nice of you, but you still really haven’t taken care of yourself adequately. Shouldn’t you be concentrating on your own life and your own retirement? These are common mistakes most women make and will unfortunately wind up as bag ladies. The best gift you can give to your daughter is to make sure you will never be dependent on her or need her assistance. Ever.
You need to seriously step back and re-evaluate your goals and strategies. Perhaps speak to a professional along your travels. You have several large holes in your plan that even my inexperienced eyes have caught.
Good luck. Prepare for yourself and never mind the rest.
PS: if you want to leave your daughter money after you are gone, take out a term life life insurance policy (for 20 or 30 years) and name her as your sole beneficiary. Your daughter will then inherit the money, tax free as the other ways you are thinking will burden her with a heavy tax load….and what’s the point of that, eh?
Nice idea…but have you ever tried to buy life insurance in your dotage? Dunno about Donna, but in my own case if I could even get anyone to sell me a life policy, it would cost so much I’d have to mortgage Argentina to afford it.
What Funny said.
You are absolutely right Funny…I have a Dear Aunt who bought insurance policies for her kids payable to them upon her death but as the premiums have increased she finds it harder and harder to pay the premiums. And if she let’s it lapse…she’s up the creek. Smarter move IMHO would have been to buy AT & T stock reinvest the dividends and leave this stock to them in her will…
I’ve painted these decisions in rather broad strokes, leaving out irrelevant and/or intensely personal details. Fact is, I do have a decent Roth already along with some other retirement vehicles. And I will likely begin to fund the Roth once more in 2016. Right now, I just want to bump up liquid savings.
I won’t be 59.5 years of age for another two years and I also would prefer to leave the Roth where it is until I do need it. If it turns out I’m managing all right on Social plus the other vehicles, I’ll probably make a contribution to my daughter’s Roth each year.
Check with an accountant on that. Roth IRA’s deposits are supposed to come from the owners’ own income.
A lot of people think that’s the case but it isn’t. From http://www.investopedia.com/articles/personal-finance/110713/benefits-starting-ira-your-child.asp:
Many parents choose to “match” their child’s earnings and make the IRA contribution themselves. For example, if your daughter earns $3,000 at a summer job, you can let her spend her money as she wishes and you make the $3,000 IRA contribution with your own money. You might also offer to contribute a percentage of what your child earns, such as 50% (your child earns $3,000 and you contribute $1,500). Whatever approach you decide to take, the IRS doesn’t care who makes the contribution as long as it does not exceed your child’s earned income for the year. (Emphasis added.)
I was thinking some of the same things as the above poster. There is another financial blogger than I read who has a great deal of money stashed for her retirement. She’s almost 70 and still works. She constantly complains of being short of funds but won’t let go of any of her funds because she wants her son to inherit.
I have to shake my head.
Donna, your decision seems to be bringing up some strong emotions! I get that: I have a lot of feelings about the financial choices some people in my life make (or appear apathetic about), but in the end, things generally work out for them anyway, so I try to not work myself up about it.
Once in a while, too, one of my hard and fast beliefs about money shifts. Just recently, for example, I came across the idea that taking a 30-year mortgage instead of a 15-year term might be beneficial if one diligently invests the monthly difference at a rate of return greater than the difference in interest. I have been dead-set on the shorter-term, lower-interest loan, but my perspective has widened to include an option that might work well for disciplined savers like Mr. Vega and myself. We still have a little time to decide.
One way in which we go against the conventional wisdom within our Debt-Free Living Tribe is using an airline miles credit card (with an annual fee!) for just about everything we buy. We pay the balance on our card weekly, rather than monthly, because that’s more comforting to me than waiting to do it monthly. The flights and other perks we earn makes the fee worth it to us, and we haven’t incurred interest or finance charges since we began our journey to debt freedom.
It was important to color inside the lines while we were learning this new-to-us, prudent way of navigating life, but now that we’ve mastered the basics, we occasionally deviate from the prescribed route when we feel we understand the implications of our actions, and are willing to accept the likely outcomes. Our decisions may not always make sense to other people, but what matters is that our reasoning is crystal clear to us.
Nothing like the words “money” and “retirement” to bring out the strong emotions, huh? As you say, I am willing to “accept the likely outcomes” of my at-times unusual decisions. So far, so good.
If I were in my 20s and deciding not to fund a Roth it would probably be a mistake. But I’m not.
My best to Mr. Vega. If I get back to Austin, hope to see you both again.
My PF guy seemed shocked when I told him NO money for kids. The boys all have the option of education and work to build their own retirement just as I did/do. Fortunately, at this point they are healthy enough to be employable. Not sure of your daughters sltuation, but that is what you feel right doing. Much as I cashed in my retirement at 30 for further education. My big no no – Paid off the house early too. Relief for sure. At 55 on track for either a frugal retirement at 62 or more comfortable at 65.
My daughter’s situation is a little different: She was disabled by an illness at age 19 and spent much of her 20s struggling to find work she could do, ultimately winding up on disability for a while. Now she has a decently paid job she can do from home but her husband is on disability and his parents live there, too. (Although the in-laws pay a relatively small amount of rent, most of the household’s money comes from my daughter.)
The two of them are playing catch-up with regard to retirement. When I was making good money with MSN one of the things I did was contribute to her Roth IRA. Currently that’s not possible, but it’s something I’d like to do again. I’d rather she have that cash at work for her now, especially if I live a very long life. (And here’s hoping that I do!)
Every parent has to do what’s right for his or her particular situation. This is what’s working for me right now.
Thanks for reading, and for leaving a comment.
You don’t have to invest the money you put into the Roth when you put it in. This year, as my employment ended, I put in my maximum allowable contribution for 2014 and 2015, but for now it’s parked in a money market fund because I haven’t come up with a good way to invest it yet. Because you can take out your contributions at any time for any reason without penalty, it’s a great emergency fund, while still providing tax savings that can amount to many thousands of dollars when you withdraw it. If you’re in a 25% tax bracket, that means you save an extra 25% (plus state tax, but I think Alaska doesn’t have one?) on all of your earnings! More than half of the money in my Roth is earnings, so the savings are substantial. Luckily, you have until April 15, 2016 to put in money for 2015. You could put the money in, but just hold it in a money market fund until you build up your outside emergency fund. I agree with you about sleeping well.
I’m still going to stick with absolute liquid cash. But that’s an interesting possibility.
Yes, this is what I was going to say. I advised my sister who has more than a year’s worth of cash saved up to put $5500 into a Roth and use Vanguard Wellesley Income as her main vehicle. She didn’t take me up on it, but at least I got the wheels turning. If Wellesley Income (60% investment grade bonds & 40% dividend paying stocks) is too risky for you, why not try Vanguard Short Term Bond Index? It is a little bit risky, but not that much, and it pays better than cash. If interest rates spike by a percentage point overnight, it will lose about 2%, max, and I think that much of a spike in interest rates is unlikely.
I recently parked a load of cash into the retirement funds because I hadn’t contributed for 2 years running, for the first time since I was 21. That’s not to say that I was ever able to max out my contributions, sadly, but contributing was never optional.
Now? I hold way too much cash because our annual expenses are far higher than ever before (childcare + family care + SF COL = oh my), and I don’t want to take the trouble of putting essentially our emergency / investing money into stocks and then cashing out later. I should find a better interim vehicle to park more of that cash.
Paying off our house mortgage was the smartest thing we ever did. All “advice” said we shouldn’t use part of the Brick’s inheritance from his mom that way — that it should all go into the stock market.
And if we’d done that, we would have lost about 40% of it — the downturn happened soon after.
Not having to make a mortgage payment, especially when you’ve been laid off or having to cover other bills, is priceless.
Other things we’ve done that wouldn’t necessarily make sense to other people:
*only paid cash for vehicles — and got them used
(If we borrowed, we did so only minimally from people who had the extra, and could use the interest. Paid those loans off asap.)
*invested in index funds. A lower return, but it’s been steady.
Hey, DF paid cash for a new car recently. He researched what he wanted, shopped like mad (and was even willing to drive as far as Fairbanks to get a better deal) and told the dealerships what he was willing to pay.
A sales guy called one day so DF looked it over, drove it around the block and said, “I’ll take it.” Easiest sale that guy probably ever made because he didn’t have to talk DF into anything.
He’d been putting money aside for a new car. Now we have it — but we’re mostly driving the 1999 Subaru still. DF calls the new one “the next car.”
Peace of mind. I like it.
I am saving for a new car too! I think with the lackluster economic “recovery” that cash buyers will be able to, like your DF did, obtain what they want at the price they request, instead of the usual runaround.
An interesting topic….and I’m torn by a couple of things. First “the paid for home syndrome”…Like your “Dearest Friend” I paid off my home and have wondered ever since if I did the right thing. I was approached a couple of years back, aggressively as a matter of fact, to refinance @2.625% for 15 years with 0 points. I could have cashed out, invested the money in my TIAA-CREF account and yielded 32% the 1st year and 16% the second. So I second guess myself…
Next the retirement/Roth/IRA dilemma…I’m getting older and have passed the minimum age to begin drawing down my IRA and before I know it I’ll reach the point where I will be required to take a distribution. I’ve run the numbers and tax pain will be benign…so I may just place the IRA money into another account that has no withdrawl restraints. My biggest worries on the horizon? Capital gains…
Am hoping to do the same with at least some of the money when I’m required to draw down. In my case I’ll be putting some of those funds into my daughter’s Roth IRA or to maybe make an extra payment against the mortgage on the rental property they hope to own by then.
Of course, maybe she should talk to you about rental properties… 😉
Hmmm….The rental biz is a bit complicated and challenging here of late. Folks that rent just don’t have the money for a variety of reasons. Which means rental increases are very limited. Add to this lenders are very skiddish about lending for rental property. Aaaand the toughest thing I see is that everything is increasing in the way of maintenance on these properties…from nails to lumber to plumbers and electricians nothing is cheap…recently at Home Depot a sheet of “junk plywood”…$32…not so long ago $9…
Hi, Donna – Wow, really brought us all out on this one, didn’t you, lol?
Well, here’s my 2 cents: Last I heard, Spirit of Alaska had a special going on where if you had an automatic deposit going into your account, they’d give you 1% on everything up to $10,000. I think you had to have a checking account. I’d check to see if it were still happening, but I’m not that good of a person.
As far as I know, no one else is giving diddly or squat in interest, but SoA doesn’t have a branch in Juneau, so I’m not bothering with it.
[PS: one more final and one more paper, and I’m free!!! Cue Kenny Loggins for the soundtrack of my life as of Monday the 11th.]
Yay on finishing school! Much admiration.
But, um, what is Spirit of Alaska? When I looked it up I found a charter company out of Kodiak…
It’s a credit union. http://www.spiritofak.com/personal/checking/choice-checking.html
Here’s that thing I was telling you about: “Get unlimited free checking with an incredible 1.25% APY.* There are no monthly service fees or minimum balance requirements, and it’s so easy to qualify, you’re probably already doing it. Make the right choice and get Choice Checking today!”
“My fondest wish is not to apply for Social or take any money out of the retirement accounts until I absolutely must. That’s because I want to leave as much as I can to my daughter, who got a late start saving for her own retirement due to disability and other issues.”
I appreciate the thought, but you know how I feel about this. Yeah, we could definitely stand to have more financial stability, but not at the expense of you depriving yourself. Besides, your life insurance is more than enough.
True that. I promise not to deprive myself in order to leave more for you. (Already not-depriving. You’ve seen the way I travel!) But I would like to leave more than fond memories and bad puns.