My Financial Goals

Friday, December 30, 2005

Roth 401k

Well I planned on starting this blog with more introductory articles on the basics investing tools available, but my employer just decided to offer a Roth 401k plan and I have to fill out the form today so I figured I'd blog about my decision process when filling out the form. For those of you who don't know a Roth 401k is a new savings vehicle that the IRS is releasing as of January 1, 2006. A Roth 401k is very similar to a Roth IRA in that any money you contribute to the plan you have to pay taxes on. The good news is that because you paid the taxes on the money up front any money you make a long the way is tax free and when you withdraw any money from this account after age 59.5 the money is also tax free. As with any plan there are advantages and disadvantages. The biggest drawback to a Roth 401k vs a Traditional 401k is that you don't get a tax deduction on any contributions you make. So you end up paying more to uncle sam up front. So in order to maintain the same amount of actual dollar contributions to your 401k account you have to take a bigger chunk out of your paycheck. For example lets say every week I get a paycheck for $1000 and I contribute 10% of my salary to my Traditional 401k plan (not Roth 401k). Contributions that I make to a traditional 401k are tax free (but withdrawals are not).

Traditional 401k Roth 401k
Gross Income $1,000.00 $1,000.00
Pre-Tax Contribution -$100.00 $0.00
Taxable Income $900.00 $1,000.00
Soc Sec Tax (7.65%) $76.50 $76.50
Federal W/H (15%) $135.00 $150.00
State Tax (6%) $54.00 $60.00
After Tax Contribution $0.00 -$100.00
Take Home Pay $634.50 $613.50
So in order to contribute the same amount of money to my 401K it is going to cost me an extra $31 out of every paycheck. Now In my example I make roughly $57,000 a year and currently contribute 14% pretax to my Traditional 401K (just under $8k a year). Which works out to about $307 every paycheck (bi-weekly pay). Now if I wanted to keep the same dollar amount and contribute to a Roth 401k I would need to contribute about 19.6% or $431 per paycheck. So it will cost me $124 extra out of every paycheck (or $3224 per year) just to contribute the same amount to my 401k. Ouch!! Now lets say I wanted to keep my paycheck the same and contribute to the Roth 401k. Now if I keep my contribution at 14% and switch to a Roth 401k, my paycheck deduction will remain at the $307, but unfortunately before that money gets to my account I need to pay taxes on it. So $307 x( 1 - .15 + .06 + .0765) = $219.04 or only $5695 per year. That's a loss of nearly $2300 per year in my retirement savings. Now time for the advantages. #1 I don't have to pay any taxes when I withdraw my money at retirement. With a traditional 401k any withdrawals are taxed as normal income. So lets say I do pretty well for myself or the government gets crazy with taxes and I am in a 35% tax bracket when I retire, well the government gets 1/3 of any money I withdraw from my Traditional 401k account. Seeing as how I am in the 15% tax bracket now it makes sense for me to pay the taxes up front as if everything goes as planned I will be in a lot higher tax bracket when I retire. If I leave the company I can roll my Roth 401k into a Roth IRA. Now this may not seem like that big of deal, but currently all retirement plans except for a Roth IRA have minimum distribution requirements. What does this mean? Well the government says once I get to age 70.5 I need to take some money out of my retirement accounts whether I need it or not. So lets say I have more money than I know what to do with and I don't need to touch my 401k or IRA accounts, I'd rather let the money keep growing tax free for my children or grandchildren the government won't let me do it. By rolling the money over into a Roth IRA though I can leave my money growing tax free as long as I would like. The longer you have until retirement the better your odds of the tax free withdrawal advantage has to overcome the tax free contribution. As you see from above it costs a lot more to contribute to a Roth vs a Traditional. If you only have a few years till retirement you probably won't be able to overcome the amount of money you had to pay in taxes up front. But if you are a somewhat young person like myself (26) with 33 years till retirement the Roth option will definitely leave me with more money at retirement. At the bottom of this article there is a Roth Analysis tool that is pretty good. You can play with it to so which option suits you best in retirement. You can select a level paycheck or a level contribution (examples I listed above). Another advantage to the Roth 401k which doesn't necessarily affect me is that if you make lots of money $95,000 filing single or $150,000 filing jointly you cannot contribute to a Roth IRA, but these people can contribute to a Roth 401k. This gives these people a chance to sock some money away that can be withdrawn tax free. I guess my explanations took up to much room and I will continue my actual thought process with a different post. Roth 401k resources 401k HelpCenter Roth 401k Analysis Tool

Wednesday, December 28, 2005

My Investing History

I figure I would give you a little history about my investments so far. I graduated college in 2002 with a Computer Information Systems degree and got a job as a programmer making $45,000 a year out of college. While it didn't happen right away I knew I wanted to start investing my money ASAP possible. I had always figured that if I started putting say $10,000 a year away when I first started working I would never miss the money or have to adjust my lifestyle to accommodate my saving/investing habits. So shortly afterwards I had a fellow classmate of mine from college approach me about an investment product he was selling. It was something called Whole Life Insurance and I eagerly agreed to set up an appointment with him, because I knew I had already wasted some precious investing time and I had no idea at that point how to invest. Well I stuck to my motto of wanting to invest $10,000 a year. Well after a short sales pitch and no research on my part my buddy had convinced me that this whole life policy would give me an 8% return on my investment, and so I told him I wanted to buy $10,000 per year of Whole Life insurance. Thankfully they'll only let you buy 10 x your salary in Life Insurance so I was only able to purchase about 450,000 worth of whole life insurance which ended up running me about $5000 a year. Regardless I was "investing" my money and had plans to put the other $5000 or so in something called a Roth IRA and some other investments my buddy would come up with. Well I ended up holding off on the other investments because in 2002 the stock market wasn't exactly roaring and I was pretty sure if I invested my money at that point in time I would actually be earning a negative return so it was better off to wait. Well about the same time I started attending graduate school for my MBA at night after work. One of my finance professors recommended that we go to as a good resource on financial matters. Well this small off the cuff remark before class completely changed my financial and investing knowledge. I read just about every article they had on their website. I learned all about Roth IRAs, Mutual Funds, Stocks, Bonds, Mortgages, Loans, Credit Cards, you name it. While I wasn't necessarily an immediate expert, I learned enough to start to take financial matters into my own hands and make educated decisions on important financial matters without the help of so called "experts" Shortly after I started doing the math on the financial figures my Whole Life agent had given me and found out that I would not end up getting nearly close to the 8% that was brought up in the sales meeting. I eventually cashed out my entire policy (at a substantial loss). I got married in the summer of 2003, and by the beginning of 2004 I had learned enough to start a Roth IRA for me and also for my wife. Both were maxed out for tax years 2004 ($6000) and 2005 ($8000). I also started contributing to my employers 401k in November of 2004 ($8000). So basically at this point I have done a pretty poor job of putting my goal of $10,000 a year away for retirement. Had I done this I should have about $35,000 put away at the end of 2005 (2002-$5K, 2003-$10K, 2004-$10k, 2005-$10k). My actual contributions have been closer to only $22K to this point in time and as we can discuss in a different post adding a catch up contribution of $10,000 now is nowhere near the same as if I had contributed that $10,000 4 years ago. So in essence I am behind the game and hopefully this blog will help be get back on track and stay that way going forward.

Wednesday, December 07, 2005

What are my goals?

Well I suppose seeing as how the title of this blog is "My Financial Goals" - I suppose I should actually talk about what my goals are. Now despite the blog title I really have not been a big proponent of setting goals for myself. I know I subconsciously have ideas of what I would like to accomplish in my life, I have never before actually defined a goal and written it down somewhere. In the past I have always been pretty good about accomplishing my secret subconscious "goals", but who knows maybe I just forgot about the goals I had failed to attain. So at this point in time I am going to dig into my subconsciousness and put some of these goals I have for myself out on paper...err well electronic storage. The first real goal I had set for myself coming out of college was to be making $100,000 a year by the time I turned 30. I don't know where this came from, but I'm pretty sure I figured that would mean I was successful at what I was doing and would allow me some added financial freedom. As far as investing using my 7th grade math skills I had decided I needed to put $10,000 a year away to become filthy rich (I was probably aiming for $1 million dollars at the time and probably wasn't going to cash in until I was 80 or so getting my 6%). Regardless this goal stuck in the back of my mind and when I got my first job I tried to stick to this - although I was not that successful - more on this in separate post) The next goal I can remember subconsciously setting for myself was that I wanted to have $10 million when I retired. This number was purely pulled out of hat and there was no logic as to how I would attain it or what I would need the money for. Probably the most poignant goal I have set for myself at this point was to amass $100,000 for my retirement by the time I turned 30. I believe this has gone back and forth from $100,000 in principal I had put away to just having $100,000 principal and interest before I was 30. I generally try to push myself to achieve the harder goal, so I believe I was generally leaning towards $100K in principal. Regardless as you can see my goals are kind of haphazard at this point and I really need to sit down and more clearly define my expectations for my financial growth and come up with attainable goals that have a plan to go with them.

High School Econ and Yoohoo

Well after exponentiation lessons in Math class I really had no reason to think about investing. Heck that was only for grown up people with jobs, I'd have to wait to put my devious plan into action. So really investing did not consume much of my thoughts through high school. Senior year I took an Economics class and while we discussed relevant economic theories I probably was too busy oogling at the girls in the class because I honestly don't remember much about the theory being taught in the class and really did not understand the stock market at all. But there is one thing I really remember from that class. Well we were suppose to pick some stocks to track, and I believe we actually competed in some mock stock portfolio competition. Back in those days I didn't know much about computers and wasn't too aware of this whole internet thing, so I'd go down to the library and look up stock prices in the newspaper (you'll see the irony in this situation once you find out what my profession is and what I went to school for the following fall). Anyway I don't remember much about my stock picks other than I decided to follow Yahoo. Now just to prove what a stock picking genius I was I honestly thought that I was following the chocolate milk shake drink (Yoohoo). Well I think I bought the stock at $8-$12 and by the time the class was over Yahoo was selling for over $100 a share and as I follow the stock for the next year or so after the class it got as high as $250 a share and was constantly splitting. Had I actually thrown some money in the stock for real I'd probably be able to buy a few of those Yoohoo drinks I was so fond of.

What got me interested in Investing?

What got me into investing? Well I am not exactly sure how old I was, but I know I was in Math class and learning about exponentiation, pretty sure it was still in grade school. Anyway as usual my mind began to wander and I probably was not paying attention to the task at hand anymore, but for some reason I decided to think of exponentiation in terms of money. Again I have no idea why because investing was not something I had ever discussed with anyone before and money really was not an important part of my life at that point. Anyway I took my calculator and punched in a sum of money, something like a 6% rate of return, for 40 years. I couldn't believe my eyes!! How could such a small amount of money grow into such a large sum, without having to do anything . Well I continued on punching in bigger initial investments, higher rates of returns, over even longer periods of time and soon came the conclusion that if I could somehow find a way to get some bank or something to give me like 5 or 6% return over my lifetime I would be very wealthy. I couldn't understand why everyone didn't do this and why people didn't just bite the bullet and put a bunch of money away for the next generation or the generation after that. I mean the number coming out of my calculator for compounding money over 100 years was amazing!! Well this was really the start for me. Had I been home sick or day dreaming about what video game I was going to play when I got home I probably would have never gotten into investing. While I never forgot about compounding, I guess I never thought I could take advantage of it until I was an adult and had a full time job so that I could then find some magical vehicle to give me a good rate of return on my money. Afterall I really thought 6% was a great return and if I could just lock something like that in when I was older, man would I be rich. I had it all planned out too. The first 5 years or so that I got a job I was going to live like a pauper and invest as much as I could. I figured If I could live the first 20 years or so of my life without making any significant money, why not extend it for a few more years once I got a job and use those resources for investing. Well as 7th or 8th grader this was my plan.


Welcome!! You must have somehow mistyped, misclicked, or missearched and ended up on my blog page. I am starting this blog to track my financial journey through life. Despite the blogs title I don't really have my financial goals set in stone, or for that matter I'm not sure I have even set a whole lot of goals for myself, but well that will be the purpose of this blog. I've run across quite a few other excellent personal finance blogs and think it is a great idea tool to learn how to manage your money better. And its a great way to make sure you are on track to achieving what financial goals you have set for yourself. Anyway bear with me as I get this site off the ground. I am pretty new to blogging and I have a lot to learn before I get this site to where I want it to be. Hopefully it will turn out half as good as some of the sites I have already run across.