I love ALL THINGS Roth (IRA’s, 401k’s, 403b’s, SIMPLE).
I think they are an incredible financial planning tool.
However, one of their perceived strengths can also be their greatest weakness.
The true power of the Roth can only be experienced if you can keep your hands out of the cookie jar until retirement.
An example:
Yancey & Rosa are both 25 and begin investing $7,000 annually (each) into their Roth IRA’s and invest in a low-cost diversified portfolio that averages a 7.8% annual return.
Ten years later, both Yancey & Rosa have each contributed $70,000 and their Roth IRA’s are worth approximately $100,000.
At age 35, they both stop contributing to their Roth IRA.
Yancey decides to take out his $70,000 of contributions and buy a boat, maintaining his $30,000 of earnings and allowing it to continue to grow at 7.8% over the next 30 years. Rosa leaves hers alone.
Fast forward to age 65, Yancey has approximately $290,000 in his Roth IRA, while Rosa, who never touched her account after age 35 has an account balance of $956,000 ($666,000 more in her Roth IRA than Yancey).
You see these examples all the time and this isn’t news, leave it alone and let compounding over time do its thing—but unfortunately it’s pretty common.
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I was fortunate enough to begin contributing to a Roth IRA’s when I was younger. No surprise, I invested as much as I could afford into my IRA and 401k.
However, where young Nic fell short is I underestimated how much my life would change.
Over the course of adopting three beautiful children and the expenses that come with it, I pulled out all my contributions to my Roth IRA.
If granted a mulligan, I would’ve taken different steps in my planning process:
- Contribute only enough to get my full employer match in my 401k
- Fund my Roth IRA
- Save & invest $100,000 in an individual/joint investment account
- Have a fully funded emergency fund (minimum of $25,000)
- Have a Home Equity Line of Credit
- After those five steps have been completed, I would’ve then gone back and contributed more to my 401k
Don’t be like young Nic and overweight one or two baskets.
Having investments in retirement accounts can make you feel great when you look at your own balance sheet, but they might not provide you with the liquidity you need when life inevitably throws you a curveball(s).
Most good plans take time, and it takes years to get the right amount of money in the right places for upcoming life events.
The best time to start financial planning was 20 years ago. The second-best time to start is today. Let’s not complain and sulk over the time that’s passed, instead let’s take advantage of the time in front of us.
If you or someone you’re close to is a high-achieving professional that could use help aligning their finances and establishing a financial plan, please reach out to us, we’re accepting new clients and eager to help.
Cheers, Nic
