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March Goal – Fully Funding Our Roth IRAs

by Ryan Guina

One of the most important things you can do for your financial future (outside of paying off your debt), is to invest for your future. Right now, my wife and I are in a comfortable financial situation. Our only debt is our mortgage, and we have been saving as much money as we can over the last year or so. However, we know this is subject to change. We plan on having children in a year or two, at which point, we will likely go down to one income.

Invest as much as we can, while we can. The way we see it, investing as much as possible now is paramount to our future. When we have children, our income will decrease and our expense will increase. This is a recipe for disaster if you aren’t prepared. Which is why we are starting now.

March Financial Goal. My goal for March is to determine the best investment for our situation, and fully fund our Roth IRAs. There are several questions we will face before we do this. I have the answers in mind, but I haven’t shared them yet on this site. Over the next month I hope to answer these questions and share them with everyone.

Invest all at once, or use Dollar Cost Averaging?

I have read several studies that show lump sum investing is better than Dollar Cost Averaging (DCA). The premise behind this is that the market tends to go up over the long run, so the longer you have your money in the market, the longer it has to appreciate. Of course, even with lump sum investing I could invest at the wrong time. But I am not trying to time the market. I am trying to get my investment in as soon as possible and let the markets do the work for me. I can’t control the markets, so why stress over when to invest?

Maxing two IRAs is a lot of money! Are you sure you should do it all at once?

We started saving for this last year and we already have the money set aside. The maximum you can invest in a Roth IRA is $5,000 for 2008, and we are maxing out two of them at once, for a total of $10,000. It took a lot of saving over the course of last year to reach that level, but we have a good emergency fund built and we are confident we can do this without stressing our budget. Remember, we planned for this well over a year ago. We need to take advantage of this opportunity while we can because we don’t know if we will be able to do this after we have children.

Why Invest in a Roth IRA?

In my opinion, a Roth IRA is one of the best retirement options available right now. You invest with post tax money, and your withdrawals in retirement age are tax free. I recently compared Roth and Traditional IRA plans. For our situation, a Roth IRA is definitely the best option.

What about your 401(k) plan?

I am also investing in my 401(k) plan as well. My company offers a small match, of which I take full advantage. For most people, it is best to contribute up to the company match, then invest in a Roth IRA. If there are funds left over, then you should add more to your 401(k) to take advantage of the tax benefits. Again, the plan my wife and I have to to be aggressive with our retirement savings now because our financial priorities will change when we have children.

Mutual Funds, Index Funds, or Exchange Traded Funds (ETFs)?

In most cases, I’m not a fan of mutual funds. Most of them simply cannot consistently beat the market over the long term. On top of that, they generally have higher management fees and those costs are another hurdle to beating the market.

For investing, I prefer efficiency, and that means minimizing fees and other costs. The best way I know how to do that is to match the market by investing with index funds. Index funds are dirt cheap to run and generally have the lowest fees possible.

Exchange Traded Funds are similar to index funds, but they are traded on the open market like a stock. They sometimes have lower fees overall, but usually come attached with brokerage or transaction fees. The benefit for investing with ETF’s is usually a cheaper set of ongoing costs. ETF’s are also usually better for large lump sum investing vs. dollar cost averaging because of the brokerage fees.

For my wife and I, we will be looking into various index funds and their associated ETF’s.

What type of fund will you buy?

I don’t know. I need to rebalance our portfolio, and will buy into funds or sectors to even everything out. I don’t generally sell my funds, I usually just allocate new funds toward the areas that need propping up. Over the course of the next few weeks my wife and I will discuss our current portfolio and our long term goals. Our investment decisions will be based on those discussions.

Will you share the outcome?

I’ll try to share my thought process and the fundamentals behind my decisions, but I may not tell you the exact fund because I don’t want influence anyone regarding a specific fund. However, fundamentals are fundamentals and people can use that information to make their investment decisions based on their situation.

Tips, ideas, suggestions? If any of you have tips and/or ideas, I am open to suggestions. Just leave a comment; I always keep an open mind regarding investments. :)


Published or updated April 22, 2011.
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{ 15 comments… read them below or add one }

1 Ron@TheWisdomJournal

That’s a great goal and one I need to accomplish myself. Seems like there’s always some expense that pops up unexpectedly.

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2 Emily

I just sent in my maximum contribution for 2007 (I was behind) and the max for 2008. It feels so good to be caring for my future.

Great post with lots of good advice!

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3 Becky@FamilyandFinances

My husband and I are almost done funding our 2007 ROTH’s and are already at work on our 2008 ROTH’s. We have the same thought: save/invest as much as possible now before we go down to one income and start our family!

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4 Ryan

Ron, Those expenses can always jump up and get you. My wife and I are fortunate right now to have put this amount of money away. I can’t guarantee we will be able to do it indefinitely, but for now, it is a great thing. :)

Emily, great job on maxing out in ’07! It is a great feeling to know that you are doing something very productive with your money, and if things go well, you will have fewer financial worries in retirement. :)

Becky, Congrats on your progress as well! ;)

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5 Ryan

Lily, in your example, if the market goes down in the short run, you’ll be buying shares at progressively lower prices. It does work both ways. ;)

But I still think lump sum investing is better overall. However, DCA is good for things like investing in a 401(k), if you don’t have a lot of money to invest on a regular basis, or if you just want to automate investing because it is easier or youy don’t have the discipline to save and invest. But if there is a choice between the two, lump sum investing is usually better.

Thanks for the comment, and congrats on funding your Roth IRA for 2008! :)

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6 WeSeed Editor

The DCA vs. Lump sum argument is a good one: neither side is “better.” Especially since so few people have $5,000 to throw in right away. DCA allows me to pay more attention to my account, which is a personal thing.

But I agree that maxing out the Roth is a great feeling, there’s nothing quite like it.

As for ideas or tips, I’m not sure how involved you want to be in the investment process, but will you be considering Lifecycle funds?

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7 Lily

Dollar-cost averaging isn’t bunk simply because the market goes up in the long run so lump-sum investing gives you more time to compound. DCA is also bunk if the market goes up in the short run, since you’ll be buying shares at progressively higher prices.

Anyway, my 2008 IRA is fully funded. :)

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8 kentuckyliz

Re: lump sum vs. dollar cost averaging. The research shows that the best time to invest is as soon as you have the money. (You can’t predict which handful of days per year result in the market gains. So, be in it to win it!)

So the question is, do I have the lump sum on hand? Yes?–then go all in. No? Then contribute on a regular basis through payroll deduction or automatic contributions. Ta da! Dollar cost averaging is the result. A lot of us end up doing this because of retirement plan contributions at work–the payroll deduction solution.

I’m really interested in ETF’s and still learning. (Ric Edelman has a lot to say on the subject.) There is a transaction fee with each purchase of ETF shares, so I’m thinking when I start down this road, of converting some existing accounts all in one swoop (lump sum end of things), and then with the ongoing monthly contributions, to allocate that to money market initially (with bimonthly automatic contributions) then pinging it over into the ETFs quarterly…(DCA end of things)…to contain the transaction costs.

Not quite ready to pounce personally, but tiptoeing up to it and preparing.

Good on ya for maxing the Roths. I’m delighted with my young decision to do this, with previous windfalls and opportunities…early money is like yeast, it makes the dough rise. That is money that didn’t slip through my fingers! w00t

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9 No Debt Plan

Roth is definitely the way to go. And go ahead and dump it all in versus dollar cost averaging. The markets have taken a beating — and could take a further one, no doubt — but get the money in there and consider it done.

I don’t remember seeing this, but I’m guessing you have maxed out your 2007 Roth’s first. Obviously you would want to do that before 2008.

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10 Ryan

WeSeed, Thanks for the comments. Using DCA to help you follow your investments is a great way to keep track. We only have the $5k saved because we planned this a year out. Luckily the interest rates were good until very recently! My wife and I have some lifecycle funds already, but I will need to do a full asset allocation analysis to determine what we have and what out goals are.

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11 Ryan

kentuckyliz, I’m still learning about ETFs as well. I like what I have seen, so now it comes down to finding our target allocation and determining which index funds or ETFs match our goals. Since we have a lump sum to invest right now, ETFs would be perfect. Your plan is well thought out and should work. Good luck!

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12 Ryan

No Debt Plan, Yes, we maxed out our 07 Roth IRAs… Thanks for double checking! I agree about the current markets. With them being down overall, now is a good time to jump in. I just need to figure out where I need to place my money! :)

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13 Ryan

Buying when the market is down is often the best time to buy! Don’t worry about it. IRAs are for your retirement, so you have a long time for your investment to grow. :)

The important thing is that you have your money in there!

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14 Amanda @ Me vs Debt

I just opened my first Roth last month. Its kind of scary when the market is down. I know I shouldn’t look, but I can’t help it! Have you experienced that yet?

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15 kentuckyliz

Volality is not the same as risk. If you are investing for the long term, then short-term volality really shouldn’t worry you one iota. The question is, what do you think will happen to the market by the time you intend to use this money?

I’m 42 and I’m eligible to retire at 52 but don’t want to really…so if I retire at 62 or 67, that’s 20 to 25 years from now! And, I’m only going to use some of the money in 20-25 years; if I live to age 97, some of my time horizon is as high as 55 years!

So what is going to happen to the markets over the next 20 to 55 years?

General market performance: in 97% of the roling 5 year periods, the market is up. In 100% of the rolling 10 year periods, the market is up. So I guess when I’m within five years of my planned retirement age, I’ll move the first year’s distribution into something safer. LOL

It is a rollercoaster going uphill. You feel the ups and downs in the short run, but over the long run you’re going uphill.

Time eliminates volatility as a risk. So never save short-term monies (within 5 years) in equities–too risky. But any financial goals longer than 5 years out, it’s too risky to NOT be in equities–because of the other risk that will eat your lunch–INFLATION.

As a young investor, the first up and down markets are really wonderful and scary. But once you’ve been through it once, you can be a placid cow of an investor and never act out of fear or greed, never follow the crowd, never time the market, but just keep sticking with it and stay in it to win it.

The 90s market runup was damned exhilirating…wow, that was fun to feel I was getting rich moment by moment. The worst bear market since the great depression happened right after that. I didn’t even look at my statements. Effective investor behavior is to BUY BUY BUY in the down markets! Don’t stop contributing, keep at it. Never pull your money out of your investments in a down market out of panic–you’re locking in your losses. You haven’t really lost money if you leave it alone, ready to get the gains again when the market recovers.

You CANNOT PREDICT which handful of days per year result in the market gains for that year. To pull your money out means you have to make another good decision about when to put it back in…if you wait until the news tells you the market has recovered, it’s too late, you missed the moment. You have to know before everyone else does.

Market timing doesn’t work. NONE of the market timing gurus/newsletters beat the market at all, much less other placid cow investors who just stay all in. Crystal balls don’t work.

Terrific book: Nick Murray, Simple Wealth, Inevitable Wealth. It will help you comprehend what you need to know to be an effective investor by controlling your own emotions and behavior and not sabotaging yourself. How to become that happy, placid cow. Short and sweet and non-technical plain English and a great pep talk for the tough times.

Good luck everyone!!!!

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