Prepare for tomorrow: IRAs

If you remember from my first blog post, I mentioned that knowing your numbers is essential to current and long term financial success. Preparing for your rainy days is no different and after the dismal collapse of savings/retirement accounts during the 2007-2008 recession, it is more important now than ever before to know where your money stands at all times. Blunt but accurate- nothing lasts forever and that could potentially include your job. The average professional is likely to change jobs multiple times during their career for a variety of reasons – i.e. more opportunities for growth, simply wanting change etc, and ultimately, those same opportunities may potentially lead to a higher income as you continue to advance in your career. 

As your professional growth continues, you’re likely to see a bump up in your bottom line (your income after taxes). As a result, it is essential to invest what you don’t spend because of the power of inflation (living below your means is essential here). Make no mistake- I’m not saying to deprive yourself or create a budget. In my opinion, budgets are silly and I advise against them because if you’re spending and investing wisely, you can afford to treat yourself and rightfully you should. Smart savings leads to more investing, which leads to more growth and wealth as a result of you putting money to work. To put it simply, investing for your future is important because of the power of inflation. For example, let’s say you make $100,000 today. You tell yourself that you’re living comfortably and that your income is consistently going to increase over time. However, what most people fail to understand is that $100,000 today is not going to be worth a $100,000 twenty years from now. Prices of goods and services will continue to rise and each dollar will buy you less than it does today.

Below is a hypothetical example of the value of what a $100 buys you in the future (essentially- how much the $100 buys you if you leave it in an account that yields little to no interest).

Source: Smartasset.com



Opening an IRA – whether Traditional or Roth is one of the most important decisions you will make for your financial well-being. Below is a brief comparison showing the most important similarities and differences between the two:

 Roth IRA:

  • Earnings (dividend income) can accumulate tax free
  • Contribution is subject to income limitation — If you earn above a certain $ amount, a contribution is not permitted to a Roth account (max contribution- $6,000 per year).
  • No deduction is permitted on your taxes 
  • No taxes to be paid upon withdrawal during retirement

Traditional IRA:

  • Earnings (dividend income) can accumulate tax free
  • No income limitation — You can contribute to a traditional IRA until you’re 70 years old no matter how much you earn.
  • Taxes are required to be paid upon withdrawal during retirement
  • Deduction permitted of max $6,000 if your income is below a certain threshold

Consensus on Roth: Funding a Roth IRA makes the most sense for young professionals. The younger you are, the more you can expect to earn as you grow older and gain more experience in your profession. Your income is likely to be much higher at the time of retirement than it is now and therefore, there is no excuse to not fund a Roth if you earn below a certain amount of income. 

Consensus on Traditional: The biggest advantage to funding a traditional IRA is the instant gratification of the $6,000 deduction NOW on your taxes (subject to an income limitation). However, you end up paying tax on any withdrawals when you retire. In addition, anyone can contribute to a traditional IRA as there is no income limitation requirement for traditional IRAs.

IRAs are highly underrated and with millennials more likely to experience higher debt (student loans) and higher life expectancies, this generation should start as soon as possible to contribute to an IRA. Retirement is decades away, however, the most important thing to remember is that you are your own #1 asset. Another thing to remember is that social security isn’t guaranteed by the time we retire so once again, make sure YOU are taken care of first and your assets are secure. Call me old school — but these are free tips that your financial planner (should you decide to get one and I highly recommend you DON’T) is probably going to tell you. However, don’t take these these suggestions at face value and read the disclaimer at the end of this post.

The reason why I advise against a financial planner is that I strongly believe you make your own financial destiny. A planner is likely to charge you high fees based on his/her recommendations and there is no need for an advisor/planner unless you’re an ultra high net worth individual. If you’d like to keep things very simple and would prefer to have investments on auto-pilot, then there is no need for a financial planner.

In order to be able to contribute the maximum to your IRA account each year — here are a few tips for savings during the year:

  • 10% of your annual income (after taxes) should be put to work each year in an online portfolio or a platform such as Robinhood. If you’re able to do more, even better.
  • Download the Mint app — I use it frequently and it allows me to connect all my liquid accounts together into one place. It allows you to see your net worth (Assets – Liabilities) at all times. This includes all the direct deposits coming from your paycheck, investment accounts, minus your total credit card balance in your credit card accounts. 
  • Don’t budget — you’re depriving yourself. Instead, just be smart and eliminate unnecessary costs (i.e. your daily $3.50 coffee from Starbucks adds up over time) each month, $1,277 to be exact in a year (on average) if you buy a beverage outside each day. If you can eliminate unnecessary costs each month, you save that much more to invest in your IRA. 
  • Set aside money from your paycheck each month and transfer the balance to an online bank that yields you a much higher % of interest than a Chase or TD, while you wait to figure out where you’re going to invest your money.

In my opinion, the below is a glimpse by age on the level of risk you should take:

20s- Most aggressive: majority of investments should be in stocks, index funds, and mutual funds. If you have little working knowledge of how financial markets work- you should only be investing in passively managed index funds (i.e. funds that generally follows a specific sector or follows the entire stock market or a broader market index such as the Nasdaq or Russell 2000). You will typically not go wrong here as you have a long investing horizon. You can afford to ride through (and will) ride through recessions and market turmoil as you are a long ways away from retirement. Mix: 80% stocks/index funds/mutual funds and 20% in an online bank that yields interest.

30s- Aggressive: Majority of investments should still be in stocks and index funds. You’ll likely look to start a family during this time and hopefully you’ve saved up for a down payment on a home as well. Life will happen as always, and you’ll incur significantly more expenses in your 30s than you did in your 20s (hence why I recommend that you can be most aggressive when it comes to investing in your 20s). Mix: 75% stocks/index funds/mutual funds, and 25% in an online bank.

40s- Moderately aggressive: This is usually the time when you’ve made a name for yourself in your career and you’re settled down with your wife and kids and the whole nine yards.. You can still afford to take moderate risks here but it is recommended to start adding some defensive investments such as bonds into your portfolio and other sources of guaranteed dividend income (REITs). This is usually the time you should start to minimize exposure to stocks, while still keeping a healthy balance of mutual funds and index funds. Mix: 70% stocks/index funds/mutual funds, and 30% in an online bank.

50s- Less aggressive: Start taking your gains on your top winners and utilizing the extra cash to go on a vacation or just simply enjoy leisure activities. Take additional gains from any other investments you may have and start stashing any extra cash into index funds that invest in typical safe havens — REITs, Utilities, Consumer Staples, or even Commodities (gold). This is usually the point in time where you may make the decision to stop reinvesting dividends and instead, simply start collecting dividends every quarter. As mentioned in previous posts — I like my equity to grow over time and hence I strongly advise to reinvest till a certain age and then start collecting dividend checks every quarter when you’re in your mid 50s. Mix: 50% stocks/index funds/mutual funds, 20% bonds, and 30% in an online bank

60s- Conservative: You’ll likely start to think about a potential retirement age as you enter your golden years. This is the time where you’ll likely hit your target dollar number (if you were smart about it)— and if you had one to begin with. Cash is king. Continue to collect dividends each quarter and thus, completely stop reinvesting dividends. Mix: 40% index funds (dividend paying), 20% bonds, and 40% in an online bank.

DisclaimerThis blog and the information contained herein is not a platform for guaranteed success on investments. The views expressed are my own and I strongly suggest to do your own research prior to making any decisions. Because the information on this blog is based on my personal opinion and experience, it should not be considered professional financial advice. The blog is a discussion forum and not a website for access to financial data. I have no access to material non-public information nor any discrete information on publicly traded companies.

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2 thoughts on “Prepare for tomorrow: IRAs

  1. Well said.
    I believe first and foremost you should max out your retirement plan from work especially ones with employer match as they typically offer the best benefit since the employer match is basically free money. After you max that (or at least max until the amount that the employer matches) and you still have more to invest, I think then you should definitely look into the Roth if you are eligible as it offers all the benefits you listed above.

    I have 3 questions for you.

    1. For the individuals that are above the income limit for IRAs (especially the Roth IRA), what is your opinion about the backdoor Roth IRA?

    2. In terms of investing in non-retirment accounts that you can tap into before retirement, what are your favorite platforms for brokerage firms and why?

    3. In terms of dividend investments, I really like the idea of reinvesting your dividends while you are younger and then as you get older, using the dividends do fund vacations and other expenses and not touching the initial investment. Do you have any specific REIT or high dividend-yielding fund that you would recommend?

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    1. 1. A backdoor Roth IRA allows you to bypass the income requirements – however, you still have to pay the tax on the conversion. What needs to happen is you either convert your traditional IRA to a Roth OR lets say in 2018, you contributed $6,000 to a traditional and you’d now like that money in a Roth. You’d have to pay taxes on the $6000 + any earnings/profits you have in your account (unrealized) upon the conversion. It’s a debatable strategy- has its pros and cons.

      2. I like Robinhood for its zero commission trading costs – has a wide variety of investment vehicles such as ETFs, stocks, index funds, etc, all at free trading costs. The only downside to this is that you cannot reinvest any of the investments on this platform. I still prefer the big online brokerages if I want the investments to compound over long term.

      3. I don’t make any recommendations on here- but e-mail me and i’d be happy to chat! REITs in general can be very profitable if you invest in the right sectors that most often are recession proof- ie. health care. However, like any investment, REITs can lower their dividend yield in times of distress. However, from experience and research, REITs that are financially sound and those with a model for receiving more upfront cash for their services, tend to be valuable over the long term.

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