Retirement Plans for Twenty-Somethings

Q: My husband and I are 24 & 25 years old.  When we got married a year and a half ago, we had $11,000 in credit card debt – about half from the wedding and the other half from a previous balance of his.  In the first year of our marriage we managed to pay off all the credit cards and since we were used to living below our means, we've since purchased a home. We’ve also managed to save three months of living expenses.  Our goal is to save another three months of expenses at the beginning of next year to total six months of expenses total. 

 

My question actually involved our retirement savings.  We currently contribute about $100 a month to my husband's TSP and $100 a month to a Roth IRA.  Now that we have three months of expenses saved up, we would like to increase our retirement savings.  We know we are young and have a lot of time to let our savings grow so we want to be doing what we can to earn the best return.  We don’t know into which retirement plan we should put more money.  Should we max out our Roth IRA so that we aren’t stuck paying high taxes when we retire or should we maximize our pre-tax money going into the TSP?  Should we be investing in stocks since they tend to have the highest yield over the long term since we have quite a few years until retirement?  Please help point us in the right direction!

 

-Cortni, Spokane, WA

A: It sounds like you already have yourselves pointed in the right direction! What a sensible, but at the same time exciting way to start off a financial lifetime together! No credit card debt, an emergency fund in place, and already socking away money for retirement…you’ve got me fired up! I think your next step should be to work on maximizing your Roth IRA contributions. For 2007, you can each contribute $4,000 to a Roth IRA (remember this has to be done before the April tax filing deadline and you must meet the income eligibility requirements) and this number jumps to $5,000 in 2008. So, that gives you plenty of room to increase your current monthly savings. Like you, I think the potential tax-free withdrawals at retirement are worth considering. Since the TSP helps with taxes now, you might consider increasing your husband’s contribution each year by a percent or two (to coincide with his pay raise)—but focus first on maxing out the Roth. Keep up the good work.

Comments

[whitney monast]

my husband is getting out of the military he is the provider of the house we have a house the payments are 680 a month we are in no debt at all after dec (we are paying off furniture) we have 6k for the transaction out is this enought ( the max of our living expensives is 1300 a month) my husband is freaking out please help

[Lindsey]

My husband is in the military, the sole provider for our family of 5. Our oldest just started college. We purchsed a home here in Texas. We are moving to San Diego CA. We have secured a rental there. Should we sell our home or keep it as a rental? We have a potential renter for 2 years. We would be $25.00 short on the house payment (including insurance and property tax.) OR we can sell the house FSBO to a friend and get back what we have invested. We did not have a large down payment on this home, and with increasing taxes I am afraid we will go further into the hole trying to rent at the price we will need. Does it make sense to rent the house for 2 more years, or take the purchase money break even and run. Then rent in Cali for 2 years while looking to buy and stay in that area for 5 more years? Right now the rental in Cali is in a much better neighborhood than we could afford and it has the best schools. My husband has 7 years until military retirement. Do you get a tax break with a rental? vs your primary home? So confused! Please help me make a decision.

[Charlene W.]

Congratulations on starting your retirement savings at an early age! I recommend educating yourself as much as possible about investing and investments. Check out www.saveandinvest.org It is a website sponsored by FINRA (www.finra.org), which is a non-profit company dedicated to investor protection and a self-regulatory organization for the securities industry, and the website has a specific site dedicated to the military.

[SSG Jason Smith]

Also, If your husband is the sole wage earner in your household, you need to look closely at whether you need to be having any taxes withheld or not. If you are getting money back when you file, then you are giving Uncle Sam too much. Adjust accordingly. That money could be going into your Roth or TSP or even saving were you could be earning interest. The IRS is not going to give you any interest for them holding your money all year.

SSG Smith, Jason

Acreditted Financial Counselor(The only one in the Active Army)