Throw more money away into Roth IRA or pay off mortgage?

[Redraidernurse]

Hello, I am new here this is my first post

(Background: We are both 25, one child, we have no debt except our mortgage of 74,000 at an interest rate of 4.875%) After graduating college, My husband and I have spent the last 4 years maxing out our Roth IRAs each year and have seen no growth, only losses. For this reason, I am losing hope in continuing to invest in our Roth IRAs and feel our money could be better used to either pay off our current mortgage, or invest in other real estate to use as rental property. I also feel this way because I have little confidence in how our government is handling the economic situation, which I find frustrating. Should we throw in the towel for the time being on investing in our Roths and use our money elsewhere? Or continue plugging away when it seems like we are throwing our money in a black pit of despair?

[Redraidernurse]

Any thought on if I put more money into the IRAs, just putting it into bonds?

[PMMM]

Certain bonds are a good alternative at this time. But it's also nice to live in your home free and clear. After the mortgage is paid off you could resume your investing and maybe the economy will be in better shape. 74K mortgage could be paid off pretty quickly.

I get discouraged as well but many are saying now is the time to buy because stocks are cheap. Don't forget investing is a long term proposition not a short term thing. Buying low will really make a difference when the price goes up and they eventually will.

[Redraidernurse]

You are right, I need to keep looking at it as a long term investment....it can be easy to lose sight of that fact. I do feel like owning my home free and in the clear is more of a psychological satisfaction than it would actually be a smart decision at this time.

[jIM_Ohio]

The best way to invest is be greedy when others are fearful, and buy when everyone is selling.

If you stop buying now, you are going to miss on big returns later.

Keep the Roth
if you want to pay down the mortgage, that is OK, but fund the Roths with 10k first

[am_vanquish]

The great thing about this is that there's no "wrong" decision. The fact that you're in tune with your money at this age and being pro-active about your future is a great thing. That said, you still want to get the most out of your money (both psychologically and in real dollars).

I'm in pretty much the same position that you are. I'm 23, and I've been contributing to a Roth account for 5 years (maxed out for last 3 years). My wife's Roth has been maxed out for the last 2 years. You and I share similar circumstances and similar views (re: govt policy), so here's some of my opinions:

1. Personally, I believe that one of the largest advantages of a Roth account is the fact that I don't have to worry about future tax rates. You mentioned that you have little confidence in the government's economic policies (so do I), which means one thing to me: outrageous income taxes are in store for the future. Because you & your husband are young-ish, I'm assuming you're in low-ish tax brackets right now. Depending on what field of work you are, your income may rise to higher tax brackets in the future. Add in the increase in tax rates because the country's being driven into a ditch by the government, and I'm glad to save money in a Roth just to save on future taxes. I guess my point is: I'd rather lose money in the stock market than wind up giving more money to the govt later on in my life.

2. JimOhio is correct (as usual) about the stock market. My wife made the same point that you're making about the stock market (her risk tolerance is probably in line with yours). The point I made to her was that if we move from stocks to bonds right now, we'd be buying into bonds after a run-up and selling out of stocks at a low point. Sell low, buy high isn't a strategy that works over a long period. Instead, I told her to think of stocks as "on clearance" right now.

3. Regardless of what's going on in the market right now, it is important to keep a long-term perspective. That's why I'm a big believer in dollar cost averaging (DCA), which is spreading your investment over many small intervals (i.e., buying into market at $400 per month every month rather than trying to "time the market" for a one-time buy-in of $4,800). Sure, there will be ups & downs. By using DCA, you'll win some, lose some, and come out in a nice, happy medium.

There's plenty more "numbers stuff" we can give you to show you that the Roth IRA is a better decision, but it sounds like you're struggling with the psychological impact more than the ### impact.

[MonkeyMama]

The best way to invest is be greedy when others are fearful, and buy when everyone is selling.

If you stop buying now, you are going to miss on big returns later.

Agreed.

When you feel like you should give up is when you should be investing more.

[Redraidernurse]

[QUOTE=am_vanquish;268264]

3. Regardless of what's going on in the market right now, it is important to keep a long-term perspective. That's why I'm a big believer in dollar cost averaging (DCA), which is spreading your investment over many small intervals (i.e., buying into market at $400 per month every month rather than trying to "time the market" for a one-time buy-in of $4,800). Sure, there will be ups & downs. By using DCA, you'll win some, lose some, and come out in a nice, happy medium.

QUOTE]


Now, this is something we haven't been doing, we have just been maxing out one time a year (whenever we have the money sitting in thesavings account getting stale). I never thought about the benefits of spreading the investment into small intervals. Is there anything we can set up to automaticallty deposit a certain amount per month? Or do we need to be watching the market monthly before we deposit (something neither of us do)?

[littleroc02us]

You have to look at the history of a mutual Fund (Roth Ira). For example I have money in Total Stock Market Index Fund and if you look at it's value since it's inception in 1992 it has a range of $9.85 - 37.50. If you look at it's history in the past 10 years it has fluctuated between $17 - $37 a share. Currently this fund is around $26 a share. This Fund tends to fluctuate with the S&P 500 almost to the tee. So, when things seem down for everyone that is the time to buy. My wife and I have been pumping money into this early on just because it has been down as of late. The pay off is long term and that is what you need to think about. Keep maxing out your $5000 each a year and work on paying down your mortgage. It will take some time, but you hate to lose out on the compound interest for the next 40 years.

[jIM_Ohio]

[QUOTE=Redraidernurse;268273]

3. Regardless of what's going on in the market right now, it is important to keep a long-term perspective. That's why I'm a big believer in dollar cost averaging (DCA), which is spreading your investment over many small intervals (i.e., buying into market at $400 per month every month rather than trying to "time the market" for a one-time buy-in of $4,800). Sure, there will be ups & downs. By using DCA, you'll win some, lose some, and come out in a nice, happy medium.

Now, this is something we haven't been doing, we have just been maxing out one time a year (whenever we have the money sitting in thesavings account getting stale). I never thought about the benefits of spreading the investment into small intervals. Is there anything we can set up to automaticallty deposit a certain amount per month? Or do we need to be watching the market monthly before we deposit (something neither of us do)?

Sure...

whoever your Roth is with probably accepts monthly deposits as automated payments. I send $562.50 per month to my Roth (and another $562.50 to wife's) and we max out very fast... if you send $425/mo you will max out in December (the December contribution will be $325).

I use T Rowe Price... Vanguard and Fidelity also use same premise (automated deposits/contributions).

[snshijuptr]

You shoulld really avoid checking the value of your Roth IRA except every 1-5 years when you go into rebalance it. You willl actually do better over the long haul by just letting the account sit and not worrying over it. Keep putting money into the Roth. At our age, we can expect high returns from early retirement investment. Also if you don't trust the government, make sure you have a good mix of international and emerging markets stocks.

[jIM_Ohio]

You shoulld really avoid checking the value of your Roth IRA except every 1-5 years when you go into rebalance it. You willl actually do better over the long haul by just letting the account sit and not worrying over it. Keep putting money into the Roth. At our age, we can expect high returns from early retirement investment. Also if you don't trust the government, make sure you have a good mix of international and emerging markets stocks.

This sentiment is correct. But I would check the balance every 6 months. And rebalance every 6-12 months, every 18 months at the most.


Before you picked your investments (in the Roth), did you decide on an asset allocation? That allocation should be above the decision about "sell stocks, buy bonds" or "stop Roth, pay down mortgage".

And then once you have that allocation, doing something like rebalancing is "easy".

So I will back up and remind you of the following


1) decide how much risk you are going to take financially.
examples here would be leverage, how much stocks to hold, how many bonds, will you hold commodities, will you day trade and many other things.

2) Translate the risk above into an asset allocation. % stocks-% bonds and % domestic-% foreign

3) Make sure the allocation covers enough details added to it- large caps vs small caps vs government bonds vs corporate bonds

4) buy funds which match the allocation in #2 and #3

5) every X months check balance
5a) every Y months rebalance (to align holdings to the allocation in #2 and #3).

My answers to above (for me)

1) minimal leverage (only my mortgage and one car payment), and once the car is paid off, I will have minimal leverage (because mortgage will be paid off in about 10 years)

2) 100% stocks with money for retirement
75% domestic, 25% foreign

3)
45% large cap (domestic)
15% mid cap (domestic)
15% small cap (domestic)
15% foreign large cap
10% foreign small cap and/or emerging markets

4) my blog probably has my holdings- I use T Rowe Price for all of the above

5) every 6 months I check balances (June and December- it's in my outlook)
5a) every 6 months I take rebalance action....

In June I adjust future contributions with anticipation in December I will NOT buy and sell anything (for example if large cap has a huge run up, I don't sell, I just stop contributing 45% of my money to that fund, and add that 45% to the other funds with deposits only)

In December I check how I did- all funds will be the percentages in #3 by buying and selling if I have to (I rarely have to). In addition my contribution percentages in December are shifted. If I know something has had a big run up, I will under contribute to it and then check back in June.

[jpg7n16]

In agreement with the posts above. While you are young, and have a long time of your life ahead of you to invest, you want your stocks to go down (as odd as that seems).

Remember buy low, sell high?

Over the next 40 or so years, you will be a net buyer of stocks. The only time you want high prices is when you are selling. Since you won't be selling for another 40 years, you want the stock prices to go lower today so you can buy more. And hope the price is high in 40 years when you will be selling.

One on One with Warren Buffett, Chairman & CEO, Berkshire Hathaway | Nightly Business Report | PBS

BUFFETT: My greed quotient has risen as stocks have gone down. There's no question about that. The cheaper something gets that you are going to buy, the happier you feel. You're going to buy groceries the rest of your life. Do you want grocery prices to go up or down? You want them to go down. And if they go down, you don't say, gee, I got those groceries sitting in my cabinet at home and I've lost money on those. You think, I'm buying my groceries cheaper. I'm going to keep buying groceries.

In other words, if the Dow Jones falls by 50% today - you should be ecstatic! You get to buy these great companies at 50% off! Stocks would be on sale

[disneysteve]

Basically what you are asking is if you should skip buying now when everything is on sale and wait until sometime later when everything is back to full price. Of course not. The time to buy is now, especially at your age.