2949: Am I Too Old to Invest with a Roth IRA AND Budgeting - An Easier, Smarter Way by Philip Taylor of PTMoney

[00:00:00] [SPEAKER_00]: This is Optimal Finance Daily. Am I Too Old to Invest with a Roth IRA AND Budgeting in Easier, Smarter Way? Both by Philip Taylor of PTMoney.com. And I'm your host and personal finance enthusiast, Diana Merriam. This is the show where I serenade you with the sweet sounds of personal finance knowledge from some of the best blogs on the planet, with the author's permission, of course.

[00:00:27] [SPEAKER_00]: And today we're actually highlighting two fantastic articles from PTMoney. So let's get right to it and start optimizing your life.

[00:00:40] [SPEAKER_00]: Am I Too Old to Invest with a Roth IRA by Philip Taylor of PTMoney.com

[00:00:47] [SPEAKER_00]: I recently received this question from a reader about investing with a Roth IRA closer to retirement.

[00:00:53] [SPEAKER_00]: Quote,

[00:00:54] [SPEAKER_00]: I am a public school teacher, 46 years old.

[00:00:57] [SPEAKER_00]: I have a public employee pension that I contribute to and can begin collecting on once I retire.

[00:01:04] [SPEAKER_00]: I will also obviously have social security money.

[00:01:07] [SPEAKER_00]: I have no credit card debt and have paid off all student loans.

[00:01:10] [SPEAKER_00]: I have some extra money to play with.

[00:01:13] [SPEAKER_00]: I was wondering if it makes sense at 46 to open a Roth IRA now if I plan to retire in nine years

[00:01:20] [SPEAKER_00]: and will no longer have much income to invest in that Roth.

[00:01:24] [SPEAKER_00]: Does nine years of say $3,500 a year into a Roth make much sense?

[00:01:30] [SPEAKER_00]: That would leave me with very little extra spending money during those nine years.

[00:01:34] [SPEAKER_00]: End quote.

[00:01:35] [SPEAKER_00]: Thanks for your question.

[00:01:37] [SPEAKER_00]: Congrats on a successful financial scene.

[00:01:39] [SPEAKER_00]: You've made great progress.

[00:01:41] [SPEAKER_00]: This is a good question to be asking.

[00:01:44] [SPEAKER_00]: My short answer is yes, it's worth it.

[00:01:47] [SPEAKER_00]: Even if you only invest half of that amount, you'll be putting an extra bit of money aside for retirement.

[00:01:53] [SPEAKER_00]: Every dollar counts.

[00:01:55] [SPEAKER_00]: The Roth IRA is certainly touted to the young as a great way to save for retirement because

[00:02:00] [SPEAKER_00]: one, the young have a long time until they retire, therefore more opportunity to make earnings tax-free.

[00:02:08] [SPEAKER_00]: Number two, the young are likely in a lower tax bracket now than they will be when they retire.

[00:02:14] [SPEAKER_00]: Again, saving tax dollars on the back end.

[00:02:17] [SPEAKER_00]: But the Roth IRA can still be beneficial to people in their 40s and 50s.

[00:02:22] [SPEAKER_00]: The good thing about a Roth IRA is that it's super flexible when it comes to withdrawal.

[00:02:28] [SPEAKER_00]: You never have to use the money if you don't want to.

[00:02:31] [SPEAKER_00]: You could just pass it along to your heirs.

[00:02:33] [SPEAKER_00]: And you could wait to withdraw the funds way down the line, like when you're 70.

[00:02:38] [SPEAKER_00]: Your investment would be worth a lot by then.

[00:02:41] [SPEAKER_00]: As a reference point, $250, $40 short of your example, invested monthly for just nine years

[00:02:48] [SPEAKER_00]: would be worth $150,000 by the time you're 75, given a 7% return.

[00:02:54] [SPEAKER_00]: And you wouldn't pay a dime in taxes on that money.

[00:02:57] [SPEAKER_00]: You could withdraw it all except the earnings at any time.

[00:03:01] [SPEAKER_00]: So if you decide two years from now you just want that cash to go on a nice vacation, you can do that.

[00:03:07] [SPEAKER_00]: Just be sure to leave the earnings alone.

[00:03:10] [SPEAKER_00]: A Roth is also very flexible in the type of investment you want to make.

[00:03:14] [SPEAKER_00]: You could keep it in cash, CDs, equities, bonds, real estate, precious metals, etc.

[00:03:21] [SPEAKER_00]: So you can really throttle your risk exposure.

[00:03:24] [SPEAKER_00]: Finally, while I'm a fan of the Roth,

[00:03:26] [SPEAKER_00]: it's also possible that a traditional IRA may make sense given your current income and tax levels.

[00:03:32] [SPEAKER_00]: I'm not fully aware of your situation,

[00:03:34] [SPEAKER_00]: so it might be wise to sit down with a CPA or fee-only CFP

[00:03:39] [SPEAKER_00]: to ask them which account makes more sense.

[00:03:41] [SPEAKER_00]: My money is on the Roth,

[00:03:43] [SPEAKER_00]: but there could be nuances that make the traditional IRA more beneficial.

[00:03:51] [SPEAKER_00]: Budgeting, an Easier, Smarter Way

[00:03:54] [SPEAKER_00]: by Philip Taylor of ptmoney.com

[00:03:58] [SPEAKER_00]: This past month, I actually did a full-blown budget.

[00:04:02] [SPEAKER_00]: On or around January 1st,

[00:04:04] [SPEAKER_00]: I wrote down exactly where every dollar was going to come from

[00:04:07] [SPEAKER_00]: and where it was going to go.

[00:04:09] [SPEAKER_00]: Then, at the end of the month,

[00:04:11] [SPEAKER_00]: I checked our bank accounts and pay stubs

[00:04:13] [SPEAKER_00]: and compared those previously budgeted numbers

[00:04:15] [SPEAKER_00]: to what I had actually spent.

[00:04:17] [SPEAKER_00]: We did okay.

[00:04:19] [SPEAKER_00]: It took a long time, but it was a fun process.

[00:04:21] [SPEAKER_00]: Yes, I'm a nerd.

[00:04:23] [SPEAKER_00]: It also taught me something new.

[00:04:25] [SPEAKER_00]: I don't need to do full-blown budgets more than once a year.

[00:04:29] [SPEAKER_00]: There's an easier way now that we live below our means.

[00:04:33] [SPEAKER_00]: What's the point of budgeting?

[00:04:35] [SPEAKER_00]: Before I dive into my approach,

[00:04:37] [SPEAKER_00]: let's look at why we even sit down to do a budget.

[00:04:40] [SPEAKER_00]: Here's how I think the motivation for budgeting can be summed up.

[00:04:44] [SPEAKER_00]: Budgeting increases your understanding of your financial situation.

[00:04:48] [SPEAKER_00]: That understanding, coupled with a few actions,

[00:04:52] [SPEAKER_00]: brings about control over your spending.

[00:04:54] [SPEAKER_00]: The control allows you to live within your means

[00:04:57] [SPEAKER_00]: and make room for savings and other goals.

[00:05:00] [SPEAKER_00]: With those points in mind,

[00:05:02] [SPEAKER_00]: let's look at what I'm proposing.

[00:05:04] [SPEAKER_00]: An easier, smarter way to budget.

[00:05:07] [SPEAKER_00]: Most people live off a pretty steady income,

[00:05:10] [SPEAKER_00]: and most people's spending tends to be the same

[00:05:13] [SPEAKER_00]: from month to month, like mine.

[00:05:14] [SPEAKER_00]: Therefore, after only one month of doing a complete budget,

[00:05:18] [SPEAKER_00]: most people will have gained a pretty deep understanding

[00:05:21] [SPEAKER_00]: of their financial situation.

[00:05:23] [SPEAKER_00]: At this point, items on a budget can be put into three categories.

[00:05:28] [SPEAKER_00]: Number one, income and expenses

[00:05:30] [SPEAKER_00]: that will not change from month to month.

[00:05:32] [SPEAKER_00]: Items in this category should be removed from your budget

[00:05:35] [SPEAKER_00]: until you do a complete budget again next year.

[00:05:38] [SPEAKER_00]: For me, this includes things like our paychecks,

[00:05:41] [SPEAKER_00]: mortgage payment, and utilities.

[00:05:42] [SPEAKER_00]: If you're paranoid about removing these items

[00:05:46] [SPEAKER_00]: from your monthly review,

[00:05:47] [SPEAKER_00]: then incorporate a monthly expense tracker like I have.

[00:05:51] [SPEAKER_00]: Number two, expenses that need to be eliminated.

[00:05:55] [SPEAKER_00]: Looking at a full-blown budget will shed some light

[00:05:58] [SPEAKER_00]: on some expenses that you can get rid of,

[00:06:00] [SPEAKER_00]: especially the expenses that you discover

[00:06:02] [SPEAKER_00]: are causing you to spend more than you make.

[00:06:05] [SPEAKER_00]: Once you close these accounts and make your final payments,

[00:06:08] [SPEAKER_00]: you can remove these items from your budget.

[00:06:11] [SPEAKER_00]: Number three, expenses needing control.

[00:06:14] [SPEAKER_00]: These expenses are the ones left over

[00:06:17] [SPEAKER_00]: after you've determined your fixed expenses

[00:06:19] [SPEAKER_00]: and after you've eliminated your unnecessary expenses.

[00:06:23] [SPEAKER_00]: These are really the items that need to be kept in your budget

[00:06:26] [SPEAKER_00]: and monitored from month to month

[00:06:28] [SPEAKER_00]: because they're the ones that determine

[00:06:30] [SPEAKER_00]: whether you're living within your means.

[00:06:32] [SPEAKER_00]: For us, this has consistently been dining out,

[00:06:35] [SPEAKER_00]: clothing, household goods, and entertainment.

[00:06:38] [SPEAKER_00]: Therefore, my point is that any budget

[00:06:40] [SPEAKER_00]: should focus on the third item,

[00:06:42] [SPEAKER_00]: expenses needing control.

[00:06:44] [SPEAKER_00]: What are your expenses that need control

[00:06:47] [SPEAKER_00]: and do you have the right focus on them?

[00:06:49] [SPEAKER_00]: My new plan.

[00:06:51] [SPEAKER_00]: What I plan on doing going forward

[00:06:53] [SPEAKER_00]: is to build a budget based on these four categories

[00:06:56] [SPEAKER_00]: that need control

[00:06:58] [SPEAKER_00]: and utilize my tracker for keeping track

[00:07:00] [SPEAKER_00]: of bill payments and account balances.

[00:07:02] [SPEAKER_00]: It's by no means a perfect system,

[00:07:05] [SPEAKER_00]: nor is it for everyone.

[00:07:06] [SPEAKER_00]: However, it's sure to keep me focused

[00:07:08] [SPEAKER_00]: on the items I can control.

[00:07:10] [SPEAKER_00]: And that's what's most important

[00:07:12] [SPEAKER_00]: when it comes to budgeting.

[00:07:17] [SPEAKER_00]: You just listened to the post titled,

[00:07:20] [SPEAKER_00]: Am I Too Old to Invest with a Roth IRA?

[00:07:23] [SPEAKER_00]: and Budgeting in Easier, Smarter Way,

[00:07:26] [SPEAKER_00]: both by Philip Taylor of PTMoney.com.

[00:07:29] [SPEAKER_00]: And I'll be right back with my commentary.

[00:07:31] [SPEAKER_00]: I really like that Roth question and PT's answer

[00:07:36] [SPEAKER_00]: because it illustrates that at any age,

[00:07:39] [SPEAKER_00]: tax-advantaged retirement vehicles are advantageous.

[00:07:42] [SPEAKER_00]: Even if you're going to retire early,

[00:07:45] [SPEAKER_00]: you will still need to fund your retirement

[00:07:48] [SPEAKER_00]: when you ultimately get to traditional retirement age.

[00:07:51] [SPEAKER_00]: And there are options to access this money early

[00:07:54] [SPEAKER_00]: where you won't pay penalty fees,

[00:07:56] [SPEAKER_00]: like a Roth conversion ladder

[00:07:58] [SPEAKER_00]: or a 72T substantially equal periodic payments.

[00:08:03] [SPEAKER_00]: Another benefit to the Roth

[00:08:05] [SPEAKER_00]: is using it for qualified education costs,

[00:08:09] [SPEAKER_00]: tax-free and with no penalties.

[00:08:11] [SPEAKER_00]: I also really appreciate the second article

[00:08:14] [SPEAKER_00]: here about budgeting.

[00:08:15] [SPEAKER_00]: This is exactly how I handle budgeting personally.

[00:08:18] [SPEAKER_00]: So it was interesting to hear it articulated this way.

[00:08:21] [SPEAKER_00]: Most of what you read about budgeting

[00:08:24] [SPEAKER_00]: is targeted at people who are starting from scratch

[00:08:26] [SPEAKER_00]: where the exercise is going to bring more awareness

[00:08:29] [SPEAKER_00]: to their situation and highlight areas of optimization.

[00:08:33] [SPEAKER_00]: But when you're mostly optimized,

[00:08:35] [SPEAKER_00]: the key is to keep your discretionary spending in check.

[00:08:39] [SPEAKER_00]: For me personally, I've budgeted $1,500 per month

[00:08:43] [SPEAKER_00]: on discretionary spending,

[00:08:44] [SPEAKER_00]: which includes things like food, clothing, vacations,

[00:08:48] [SPEAKER_00]: and pretty much anything beyond my fixed expenses.

[00:08:50] [SPEAKER_00]: So while I still calculate my savings rate every month,

[00:08:54] [SPEAKER_00]: which considers things like my income and fixed expenses,

[00:08:58] [SPEAKER_00]: the only area I'm paying very close attention to

[00:09:01] [SPEAKER_00]: is that discretionary number,

[00:09:03] [SPEAKER_00]: which definitely simplifies things.

[00:09:06] [SPEAKER_00]: And that's it for today.

[00:09:08] [SPEAKER_00]: Thank you for listening.

[00:09:09] [SPEAKER_00]: Have a great rest of your day

[00:09:10] [SPEAKER_00]: and I'll see you in tomorrow's show

[00:09:12] [SPEAKER_00]: where your optimal life awaits.