This week, Money360 is doing a five part series on financial topics that scare me just a bit. Researching and then writing about them will (hopefully) alleviate some of that fear Other fears include buying a car.
Even when I was at the worst of my overspending habits, I always contributed enough to my 403(b) and other retirement plans to earn the employer match. I could never argue against a 100% immediate return on the money I put into those plans.
I started putting 6% into a 403(b) at age 23, which was completely matched by my employer. After changing jobs three years later, I put in 5% into that plan, which was completely matched by my employer. Assuming an 8% return on my investment (a pretty low expectation, considering it’s all in index funds), I could start withdrawing my full salary from these plans indefinitely starting at age 60. I figured it was more important to pay off debts and other things than invest in another retirement plan.
As I grew older, started a family, had a child, found myself in the pit of financial despair, and began to dig myself out of it, I began to realize that I did need to invest more of my money for the future, but I still couldn’t see why anyone would want to invest even more for retirement.
There were two things blindsiding me. First, I was still stuck in the mentality that income tax was just another paycheck deduction. I didn’t consider that tax rates might go up over time or that my income might push me into a higher tax bracket. Until recently, income taxes were merely something that went away every paycheck to some magical, mystical place, and when I filled out forms early in the year, I might get a little bit of them back – but maybe not. Roth IRAs basically commit some of your money to staying at the interest rate you’re paying now – which I believe will just go up over time as I move up in income. If that proves to be true, Roth IRAs are actually a way for me to save on income tax when I get older.
The second factor was that I was content to keep my current income level in retirement. There was no thought of the possibility of a wealthy retirement, with a nice big house with grandchildren running around and a beautiful place to spend twenty years of retirement with my wife. Right now, since I’ve paid off my high-interest debts and I’ve not yet really considered a house purchase, I have the ability to put plenty into a Roth IRA, which will do nothing more than enable me to afford a beautiful house for me and my wife to grow old in together.
So I’ve made up my mind: starting in January, I’m going to open a Roth IRA and contribute $80 a week to it. I’m not going to start one this year because I have my budget to the end of the year completed (so I can manage holiday spending), but I am finally ready to take that leap and get a Roth IRA.