Roth IRA: Am I saving too much for retirement?

What’s inside? Here are the questions answered in today’s reader mailbag, boiled down to five word summaries. Click on the number to jump straight down to the question.
1. Am I oversaving for retirement?
2. Same-sex marriage and taxes
3. Pricing of e-books
4. Handling a complex debt snowball
5. The very first step
6. Next steps for young programmer
7. Sharing costs of electronics
8. Calculating cost of bread
9. When should I begin investing?
10. Unexpected retirement funds

Over the last year, my children have absolutely fallen in love with Vincent van Gogh and impressionist and post-impressionist art. Sometime in the next week, they’re going to go to an art museum with a huge impressionist and post-impressionist exhibit.

Of all of the things we’re going to do this summer, a trip to an art museum is easily in the top five for both my five year old son and my three year old daughter. (And, yes, they know what an art musem is and, yes, they know they should be relatively quiet and sedate while there.)

My son says, “I want to get up close and see the brush strokes.” Me, too.

Q1: Am I oversaving for retirement?
I’m 31 years old and have worked in IT at a mid-western university for the last 10 years. I now make $52k/year. My university puts 14% of my income into a retirement fund with no matching required. Many years ago, I started my own Roth IRA and at this point I put aside another $333 into this Roth IRA.

But here’s the catch. I feel like I’m not saving for other things that might be necessary like home improvement projects and emergencies (I do have another $6k as an emergency fund).

I’m mostly looking for some sort of affirmation that maybe I’m putting too much into retirement.
- Aaron

If you’ve been putting 14% of your income away for retirement since you were 21, you’re almost assuredly in very good shape today. By my back of the envelope math, you should have somewhere near twice your annual salary in that account (depending on a lot of factors). That’s a very good amount to have at age 31.

At this point, if you feel your retirement savings is keeping you from other goals, you’re probably okay cutting back on the Roth contributions. Your 14% in your retirement plan is a very good amount for retirement and will leave you in very good shape if you stay in your position for thirty years.

Before you switch, though, I’d make sure that you know why you’re switching. What are your goals with the money if you make a change in your savings? If you can’t identify a clearly stated purpose, leaving the contributions in the Roth is just fine.

Q2: Same-sex marriage and taxes
My partner and I now have the opportunity to marry in the state of New York, but we are confused as to how this will impact things like filing taxes. I know that other states have allowed same-sex marriage before this, but it seems difficult to find firm answers for how this will work. Since Iowa has granted same-sex marriages for the last two years, I wonder if you can speak to it at all?

For example – one particular hurdle that comes to mind is what filing status do we even use on the Federal return? Can we even say that we are married? Or do we file as two single people?

Any information you can point me (and I’m sure the many other similar couples that read your blog) towards would be greatly appreciated.

Thank you so much for all of the help you give to so many people. I was always pretty good with money, but mine and my partner’s lives (we’ve been together for over 6 years and celebrated a wedding, though not legal, one year ago) have benefited greatly from so much of what you have written and shared freely.
- Sarah

First of all, responses about the morality or legality or constitutionality of Sarah’s marriage are not welcome here, whether in favor of it or opposed to it. She’s asking a relevant question about taxes, nothing more, nothing less, and this should not turn into a battle over the morality or legality or constitutionality of same-sex marriage. If you wish to engage in that battle, try this site or something similar.

In Iowa, and the same certainly should apply to New York, same sex couples may file their state income taxes as “married filing jointly” or “married filing separately.” However, federal law does not recognize the marriage (for now), so you will have to file federal taxes as “single.”

The Iowa Department of Revenue has special calculating rules for people who are filing “single” federal returns along with state “married” returns, as our state income taxes are directly based on data entered on the federal income taxes. The calculations are pretty straightforward and will likely be handled in common tax filing programs such as TurboTax.

Q3: Pricing of e-books
i’m in the process of writing an e-book. been reading John Locke’s book on self-publishing ebooks. He says that he only charges $.99 for his ebooks and that this strategy has helped him outsell many more well-known authors.

Just curious as to your strategy of charging only $2 for your ebook on blogging (which i bought and found very helpful by the way). Was there a specific reason you priced it so low? Also, if you are comfy sharing it, how many copies have you sold at this price?
- Mark

I originally priced it low for the same reason that Locke did: if you price it low, you’ll get a lot of buyers because the book is a bargain. Plus, there’s the added factor that the content in those e-books is already available on my website (but spread across a large pile of posts). The e-book is just a convenient way of packaging those posts all into one place.

I sell an average of about six a day. It tends to sell more on weekdays, with a peak often coming on Tuesdays.

It’s not a big revenue stream. The six e-books add up to $12 total each day, but when you subtract out the PayPal transaction fees, the occasional people who try to play games by revoking their payment, and the cost of the e-commerce setup, my daily gains on it are quite low. I usually roll that money straight into upkeep costs on The Simple Dollar.

Q4: Handling a complex debt snowball
I’m wondering if we should start contributing to my husband’s 401K through work or wait. The past few years have been very tough financially; one blow after another. Most recently he was injured and was out of work for almost 6 months. Thankfully, he is back now and even got a raise. We expect to net about $75 extra per week due to the raise. We intended to pay down credit cards before beginning a retirement plan (at least the high interest ones), but now with the raise, I’m not so sure. His company will match half up to 3%. So if he contributes 6%, they will contribute 3%. How do we balance debt vs. free money in retirement.

I am a teacher so I have an automatic pension. We both plan to work as long as possible (he does not like to be idle) and we have not made retirement a priority. We have $30,000 in IRAs at our credit union (low interest rates but no fees).

Credit card debt is as follows:
Home Depot – $772 – 0% but goes to 25% in Dec.
Sears – 417 – 25%
Chase – 10,443 – 8.9% fixed (account bought from countrywide and closed)
Lowes – 4,040 – 4.9% fixed and closed to preserve low rate
Penneys – 3,081 – 6.9% fixed and closed to preserve low rate
Capital one – 5049 – 0% until next May, then 18 %
Credit Union – 4840 – 7.9% variable, but always good rate
Chase (TRU) – 503 – 19%

I usually use a hybrid snowball plan, meaning I focus on the highest rates first, unless there’s a low rate with a really small balance I can just pay off. I’m just unsure how to use the extra $75 each week; all on debt repayment, or part to retirement, and if so, how much?
- Emily

The only time I would ever suggest that someone forego matching money in their retirement plan is if they’re on the verge of bankruptcy. If you say no to it, you’re saying no to free money.

Another way to think of it is this: when he deposits that 6% into his retirement savings, he immediately gets a 50% return on that money. That 6% turns into 9%. That $100 turns immediately into $150.

Unless you are absolutely desperate, don’t turn down that free money.

Now, as for your debt snowball, I would always order debt by what they’re going to be. Ignore the “teaser” rates that are low for the moment, because if you ignore them, they’ll rebound on you and you’ll essentially be charged painful interest on the high balance that you didn’t touch earlier.

Q5: The very first step
Prior to 2002, I had a good job, earned about $48,000 year and was happy. In 2002 I was diagnosed with breast cancer, which changed my life drastically. I no longer liked my life, quit my job and went to massage therapy school and now I am finally back to a normal life as life can be normal. During my cancer treatment, I made some horrible financial decisions and it is going to take me a long time to dig myself out but I am confident I can do it, just need some guidance. I now have a steady income plus extra income coming in, so I want to see if there is a book and a good budget form to use to help get me started. I currently work full time for a hospital and make about $1,200.00 per month, plus my massage income and I just published a book on amazon.com. I have already noticed that as the money for the book comes in I have been paying bills but not really seeing any income for me to save. I have sold 250 copies but feel the money is going out as quick as it is coming in. I am a single mother and my son is going off to college this fall, but thankfully his college is covered by financial aid this year.

I have decided this week is the week that I really understand my finances so I am taking each bill as I open it and looking but it gets frustrating. If you know of computer program that I could download or a form I can copy off that will help me get started I would appreciate any assistance. I do have microsoft excel to design a spread sheet but don’t know what to put on it.
- Kelly

I’m not sure you’ve exactly figured out what you’re looking for in a computer program. A computer program usually solves a specific problem that you have, but I’m not sure you’ve really sat down and pieced out what that problem is yet.

The first step I would take in your case is to simply start jotting down every purchase I make of any size in a pocket notebook. If you put a quarter in a parking meter, jot it down. If you spend $2 at a coffee shop, jot it down. If you spend $50 at the arcade playing Pac-Man, jot it down.

At the end of the month, go through all of the things you have written down and figure out which ones were useful and which ones were not, then strive to cut out the activities in your life that led to the ones that didn’t bring you much value in life.

That seems to be what you’re going for here, and a pocket notebook solves that problem better than a computer program because of the portability and flexibility.

Q6: Next steps for young programmer
I am 24, I have a full-time job as a programmer. But my salary is low for this type of position, about $2800/month before taxes. I rent a studio with my husband, we don’t have join budget, but we pay a half for rent (about $400 each). I don’t have any student loans, I got my bachelor’s degree outside of the US, I bought a used car for cash and don’t have any other debts. I am trying to buy just necessities, don’t go out very often, try to save as much as I can. I have a good credit, about 720 and about $7000 in savings.

I am a little bit confused what I should do further. I am able to save about $700 each month, but I don’t have any investments, IRA accounts, etc. My question is.. what is your opinion by looking at my situation would be a smart way to manage my money. Should I open an IRA account and start saving for my retirement, or.. just saving to get a mortgage in the future, or maybe I should go back to school to get a degree in the US? I am afraid of having debts and loans, and would like it to be smooth. I am also trying to do some side-programming, to increase my income, but it doesn’t go pretty well yet. At the same time I want to have a kid eventually and I have a goal to earn at least $6K by that time when I will ready to have it.

Is there anything you an advice in my situation? Right now my money is just sitting there without bringing me any profit. But also I read that we should always have an emergency-money just in case.
- Nina

$7,000 amounts to an emergency fund of roughly four months of living expenses (based on what you’re describing), which is appropriate. If you feel it’s a bit on the large side, though, it’s fine to cut your emergency fund down to two months (or so) of living expenses and invest the rest. It’s hard to tell exactly how much that is from your email – you’ll have to run the numbers yourself.

So, what do you do with the excess? The first thing is always to set a goal with it. If you don’t have a goal when investing your money, you’ve got an incredibly good chance of incorrectly estimating your risk. The longer term your goal is, the more risk you can tolerate right now.

If you overestimate your risk (meaning you need the money earlier than you expected), for example, you would put your money into something with too much risk and you’re likely to find that investment with a loss when you actually need it. If you underestimate your risk (meaning you don’t need the money as soon as you expect), you’ll be where you’re at now.

Figure out what your goals are, how long the term is with those goals, and how much risk you can tolerate with those goals. This will lead you right to the appropriate investment.

Q7: Sharing costs of electronics
My boyfriend and I started living together a year ago. We don’t have plans to get married at this point. Other than groceries, all items in our condo are “owned” by one person or the other. Because my boyfriend owns the mortgage, he generally pays for any home repairs or upgrades.

However, we recently decided to mount both of our flat screen TVs, one of which is his and the other is mine. Because it is my TV that is being mounted, and the cost of doing this is pretty high, I volunteered to pay for my portion of the cost of mounting (the mount itself, labor, additional parts, etc.). We decided that if anything is to happen to us, that my boyfriend will pay me back for these costs and purchase my TV from me.

Do you have any suggestions for how we put this to paper? Will he owe me the exact amount I paid for the mounting + an agreed upon price for the TV? Or should the cost of the TV degrade over time? Does this need to be a legally binding document or will a simple agreement signed by the both of us work? Any other suggestions?
- Anna

The concern here isn’t just the television. How much of your arrangement is actually on paper? If your answer is none, your arrangement is a much bigger problem than just your television.

If you feel you need legal documents to ensure the future of this television, then you should ask a lawyer to help you draft an agreement that clarifies your entire property arrangement, because there are clearly some property ownership issues going on here.

Don’t just solve the television problem. Solve the problem in a broader way.

Q8: Calculating cost of bread
I’m trying to calculate the cost of making my own bread vs. store-bought. I’m having to make bread every 3rd day and it takes right at 3 hrs. 40 min. to bake from start to finish.

I have the cost of the bread flour figured out and the cost of the yeast. The salt, sugar and oil are negligible, so I’m not counting them, but the only other high cost would be the electricity used in my bread machine.

Which also brings to mind another question — which is cheaper, bread machine vs. manual bread making? With my machine, I can make one, 2.5 lb. loaf of bread. Making it by hand, I can make 2 to 3 loaves (2 loaves plus some rolls).

Am I getting too critical about the cost of this?

I thought you mentioned that you made your own bread. Do you still do that? Do you make it by hand or with a bread machine? If by machine, do you have a favorite recipe that you follow?
- Carol

I think you’re worrying about it too much. My experience has been that making my own bread is less expensive than buying it, but not inexpensive enough to make it worth the time investment.

If you want to calculate the energy use of your bread machine, the easiest way to do that is to look in the instruction manual for wattage use. If you no longer have the instruction manual, search on Google. What you’ll want to do is convert it to kilowatts (if the unit given is in watts, divide it by 1,000), multiply that kilowattage use by 3.7 (the hours you’re using it), then multiply that by about $0.11 (the cost per kilowatt hour).

For me, though, it’s really all about the enjoyment of making homemade bread. The process is fun for me, so the fact that it saves a bit of money is just icing on the cake.

Q9: When should I begin investing?
My question for you is at what point would you recommend that someone begin investing? By investing I mean stocks, bonds, mutual funds, etc… My current financial picture is this: I have $13,000 in a Roth IRA, which I contribute $50 to every month. I have an ING emergency fund of $4,000, which I contribute $75 to every month. I don’t have any other savings account. I am 26 years old, single, and will be finishing graduate school next year, after which I can expect to earn around $40,000 in my first post-grad school job (in education). I do have student loan debt: $17,000 at 4.2% IR from undergrad (in deferment) and will have about $36,000 at 6.8-7% IR from grad school. The recommendations I have heard regarding investing in stocks/bonds/mutual funds is that you should have eliminated all of your high-interest debt before you do invest. However, if I wait until this happens, it will likely be ten years before I can invest. My long-term goals are pretty simple – be debt free, get married, own a home, be able to contribute a little to my future children’s education, and have enough to retire in my 60s and spend my time volunteering, spending time with family, and traveling. Based on my financial picture, do you have any recommendations on what I could be doing to put myself in a better position as I move towards my goals, and would this include investing in the next 5-10 years?

I currently work part-time while in graduate school and bring home about $1000/month. This goes right to rent, groceries, and the contributions to the emergency fund and Roth IRA. I will also one day inherit approximately 140 acres of land, which could potentially be a great financial asset, but this will be upon the death of my parents and hopefully that is still 20-30 years down the road.
- Katie

The word “investing” is a tricky one. Most people associate it with the things that you mention, but that’s just one part of it. Money sitting in a savings account is invested – it’s about as safe as can be and is incredibly liquid, but earns only a small return. You can look at almost any financial investment from the same light. Beyond that, there are investments in things like bulk food (which saves you money by exploiting the marketplace on things that you consume) or in things like education (which earns you more money over the long run).

Debt repayment is certainly a form of investment. If you make an extra debt payment, it’s the same as making a very secure investment that returns an amount equal to your interest rate on your loan for as long as you hold the loan, but one that isn’t liquid at all. If you owe $40,000 and you make a $1,000 early payment, you now only owe $39,000. 10% interest on a $40,000 debt is $4,000 per year, while on $39,000, it’s only $3,900 per year. That $1,000 investment reduces your interest by $100 for each remaining year of the loan – a 10% return on your money. That’s a very good investment that you’ll never consistently beat in the stock market.

Aside from an emergency fund and a bit of retirement savings, your focus right now should be on wiping out those debts. Every extra payment you make on those debts is one of the best investments of your money you could possibly make.

Q10: Unexpected retirement funds
I was working outside the US for three years. The laws of that country dictated that I contribute 4% of my salary to a pension, and my company contributed 8%. I had assumed that these were pre-tax contributions and I would be able to roll over this sum to my existing 401k. I have just moved back to the US, and right before I left I found out that my pension was post-tax rather than pre-tax, and as such, was paid out to me directly.

So I have a chunk of money that was intended for retirement, and I’m really confused about what to do with it. I have no credit card or non-mortgage debt and an emergency fund of six months expenses, so I don’t need it for those things. I am not eligible for a Roth, and there are limits to how much one can contribute to a regular IRA per year. I have always liked the essential nature of a 401k in that it is untouchable. I need to find an investment option that makes the money less easy to access, isn’t as risky as stocks but has better yields than bonds. Any advice on options to consider?

I know this is a good problem to have, I’m not complaining. I’m just confused.
- Kevin

The better the returns you get, the more risk you take on. If you’re looking for something with the security of bonds, you’re going to have to accept the returns that bonds give you.

If you’re looking for a stable stock investment, your best bet is probably in a large company that has a very long history of paying dividends – or, even better, an index fund of nothing but a set of those companies. The Vanguard Dividend Appreciation Fund is a great example of this.

If I were in your shoes, though, I would probably put this money into a savings account, then max out my IRA contributions with that money for the next few years. This effectively locks it away for retirement, which is how you invested it in the first place.

Got any questions? Email them to me or leave them in the comments and I’ll attempt to answer them in a future mailbag (which, by way of full disclosure, may also get re-posted on other websites that pick up my blog). However, I do receive hundreds of questions per week, so I may not necessarily be able to answer yours.

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