Retirement at Twenty-Five?
August 13, 2007
A financially-savvy friend had been poking and prodding me to work up a budget, establish emergency savings, and invest for retirement. BORING, I thought in years passed. I'm young and retirement is forty years away. Why do I want to squander my hard-earned puny paycheck away into an account that I won't see for nearly half a century?
And then it hit me. I don't want to retire a poor woman. My mother only recently started investing in a 401k—she has a mere 13 years before (ideal) retirement. I don't want to be in that situation.
But how do I save for retirement without a 401k or something similar through my employer? Behold the power of the Roth IRA. Small yearly investments, compounding interest, and tax-free earnings? Show me the dotted line. Apparently, I'm at the perfect age to invest now and have over a $1.5mil by retirement, though this doesn't account for inflation. If I invest the maximum allowable amount in a Roth alone, I should earn an inflation-adjusted amount in the upper six-figures by age 65. Plus, I'm pretty sure I'll have a 401k available to me in the future, as well as other taxable retirement accounts if I stick to this plan, so building a cushy nest-egg is definitely feasible.
But the conception was the easy part. Setting up a budget, analyzing my past spending patterns, and cutting costs were a little frustrating, but well worth the effort. I'm sure my future-self will be very thankful that my present-self heeded good advice and got on the right path to financial stability.
Now here's the million-dollar question... literally. Do I invest in a Roth now, or should I pay off my other higher interest debt? My student loans have interest rates between 7.22% and 9.5%. Those rates would basically negate the earnings any investments would make during the life of the loans. On the other hand, retirement assets will compound interest for 40 years, whereas the loans will be paid off in less than 10 years. In a vein similar to why people choose Roth over traditional IRAs*, I think I may opt to save for retirement before allocating payments to debt because these are years that I will never be able to recover. I know some people would argue either side, but I hope I'm making the correct decision for my own future.
*Having a tax break in retirement when one is unable to work and recoup costs is much better/easier/smarter than having a tax break now, in the prime of one's working ability.