Retirement - how to save as a couple?

[BMEPhDinCO]

Hi all,

My question is for those "rule of thumbs" for retirement. My husband and I are in our mid-to-late 20s and both students right now for our PhDs. However, his parents give us a little extra to help out so I want to use that to help bulk up our retirement savings.

Here are the options:
Roths - we each have one
TIFA-CERF accounts at the schools (no match) - we each have one
regular IRA (I rolled my 401k from work into one) - mine only
non-retirement account at Wachovia - mine only

With EVERYTHING, we might make up to $63k a year....but really, we're closer to $53k - the rest would be from my husband's self-employment and that's not really stable (and has high taxes taken out). My income is closer to $21k and DH is closer to $14.5k, the rest comes from his parents (~$18k).

However, the "rule of thumb" is 13-15% for our age range and that equates to $6,400-$8,000 if we use the $53k. So my questions:

1. Should we try to max out the Roths ($10k) or just go with the percentages and put the rest into savings, pay down the mortgage, etc?

2. Should we split the funds between the Roth and the TIFA-CERF accounts?

3. Is that rule of thumb for each individual or for the couple - that is, should I be saving 13% of the $21k and my DH saving 13% of the $14.5-32.5k? Or should we only save 13% of the combined income?

4. That is gross, of course taxes reduce it a little bit...should it be based off of gross or net?

Other info:
I did work for two years and put 3% into my 401k - that amount was rolled over into the IRA and has around $6,500 in it. However, I wasn't vested when I left so the match didn't go through.
The Wachoiva has around $11k
My Roth has around $7,700 right now, DH's has around $5,500
Other than my two years working, we've both been in school the whole time so had little chance to get a 401k or anything else...so we might be a bit behind.
We don't plan on retirement until our early 70s and we don't plan on counting on any SS.

So thoughts anyone? Should we max out the Roth? Only put in 15%? Is that 15% for each person or jointly? Should we put money into the TIFA accounts as well?

Thanks!

[littleroc02us]

Your going through an exciting time in your lives and there's a lot to think about. My first question would be, how much debt do you have and how much in school loans will you have when you graduate?

[jpg7n16]

1. Should we try to max out the Roths ($10k) or just go with the percentages and put the rest into savings, pay down the mortgage, etc?

You should take any employer match provided at your jobs first.
Then eliminate any high interest debt (5-7%+)
Then once you have no more high interest debt: because your incomes are so low, it is more favorable to pay the taxes today - so use a Roth.

Note: you do not pay taxes on the money given to you by his parents. Gifts are not income. So your actual income is only $35.5k, which is an extremely low tax bracket today for a married couple who files a joint return.

2. Should we split the funds between the Roth and the TIFA-CERF accounts?

Once you are in a position to invest, you should favor the Roth and only use the other account if there is some sort of matching incentive.

3. Is that rule of thumb for each individual or for the couple - that is, should I be saving 13% of the $21k and my DH saving 13% of the $14.5-32.5k? Or should we only save 13% of the combined income?

It literally doesn't matter, but the end goal is that you have combined finances, so on the combined amount.

Why it doesn't matter: if you remember back in algebra, by the distributive property, A*(B+C) = A*B + A*C ; therefore 13%*(21k+32.5k)= 13%*21k + 13%*32.5k. The results are identical, so it doesn't matter.


But say your husband gets a company match on the 1st 15%, well you should definitely do 15% from his, and adjust your's down a little. But that would be extremely rare, so in all likelihood, it won't matter one bit. Just do 13% each, and you'll get 13% combined.

4. That is gross, of course taxes reduce it a little bit...should it be based off of gross or net?

It is based on the pre-tax income.

[bjl584]

To oversimplify things, you should be striving for a savings rate of 20%. You are married, so that is 20% of your combined incomes. A few factors go into how you handle debt repayments and how that translates into the amount that you are willing/able to save in addition to repaying your loans. But that aside, 1st save up an adequate emergency fund (3 to 6 months worth of living expenses), 2nd take advantage of a company sponsored retirement plan up to at least the match. 3rd take advantage of ROTH IRA accounts. 4th save additional funds in a taxable brokerage account.

[BMEPhDinCO]

Here's a little more information, since it came up in the replies:

We have a mortgage ($97k @ 5.5%) on a house worth somewhere around $135-163 (market is weird here).

I have student loans (currently deferred until 6/2013) that are just under $11k and at 3.5%, DH has no loans.

We have paid for cars.

We have $10k in our EF - that's 4-5 months plus we have another $10-12k in other accounts that could be used in an emergency (car fund, house fund, etc - NOT retirement).

Neither of us will have additional loans for school.

There is no employee match for anything.

So if I'm reading this correctly, with the above info factored in, we should be putting 13-20% into a RothIRA - because 20% would be over the max allowed, we should be putting the additional amount into the TIAA-CERF accounts...is that correct? And because the replies vary by 7%, should we put the max into the Roth (plus extra elsewhere) or should we just pick a percentage (say 15%) and we would be ok? I would like to have money for other things...fixing up the house, trips to visit family, etc but I do want to make sure we'll be ok in retirement since we are students basically through our 30s and thus starting late for real savings.

I do know the general rules, I'm just trying to apply them to our situation, where we have the EF, we do NOT get an employee match, and we are in a very low tax bracket now.

Please let me know if my thought process is correct, thanks!

[jpg7n16]

So if I'm reading this correctly, with the above info factored in, we should be putting 13-20% into a RothIRA - because 20% would be over the max allowed, we should be putting the additional amount into the TIAA-CERF accounts...is that correct?

That's exactly correct.

And because the replies vary by 7%, should we put the max into the Roth (plus extra elsewhere) or should we just pick a percentage (say 15%) and we would be ok?

I went with 13% because it was the number in your original post.

Typically my advice is a goal (aka something to shoot for over time, not necessarily straight-away) of somewhere 15-20% based on a few factors. The lower your balances, the higher the percentage. The more cash available in your budget each month, the higher the percentage. The lower your risk tolerance, the higher the percentage. etc.

Given these factors, you are both fairly young (in your 20's), but don't have much room in the budget (as your spouse's family is giving you money each year to support you). This indicates a lower percentage IMO.

Since the 15-20 is a goal, I thought 13% wasn't worth arguing over. It's a great starting point and you seemed comfortable with it. Though Brian's exactly right, 20% is a great goal to shoot for over time.

I'm just trying to apply them to our situation, where we have the EF, we do NOT get an employee match, and we are in a very low tax bracket now.

Please let me know if my thought process is correct, thanks!

I like your thought process. You are working towards a PhD after all

Absence of a company match favors a Roth. A low tax bracket definitely favors a Roth. So whatever percentage you guys are comfortable with, I'd put as much into the Roths as you can, and only use the other account after they're maxed out.

And your low interest rate debt favors investing in my book (over debt reduction). You have a decent EF in place - right in line with the guidelines of 3-6 months. You have good equity in the home, and a decent interest rate (can you refi lower? I heard of people getting rates in the low 4's). You won't be incurring any new debt for school.

Don't see any glaring problems Are you both covered by life insurance? Do you each have a will in place? Younger couples tend to forget to make wills - so thought I'd ask while you're here.

Best of luck to you both!

[Slug]

Great advice JPG. Totally aligned with your thinking here. Definitely max the Roth's.

[BMEPhDinCO]

Thanks everyone! Looks like we'll max the Roth and try to put extra to cash accounts and the schools' retirement plans.

JPG, my husband doesn't have life insurance (rock climbing apparently jacks up the price..even in CO!) but I do. We don't have official wills yet, although after my recent car accident scare, we should probably be doing that. We can't refinance because, as grad students, our income isn't "secure"...already tried and found that out (and we had over $50k cash at the time!), but we don't plan on living in the place forever either.

[jpg7n16]

Thanks everyone! Looks like we'll max the Roth and try to put extra to cash accounts and the schools' retirement plans.

JPG, my husband doesn't have life insurance (rock climbing apparently jacks up the price..even in CO!) but I do.

Well that's good for him, and bad for you. You need some sort of protection against something happening to him. Maybe a 15-20 year term policy? Those would have lower rates than a 30 year term.

We don't have official wills yet, although after my recent car accident scare, we should probably be doing that.

It would def be good to look into getting those prepared. You should check your beneficiaries on accounts/policies, just to double check that they would be left to the right people.

We can't refinance because, as grad students, our income isn't "secure"...already tried and found that out (and we had over $50k cash at the time!), but we don't plan on living in the place forever either.

Lame oh well. If you move shortly, it wouldn't have matterd.


Sorry to diverge off your original topic, but I didn't see any real issues with your plan as is If you max your Roth's you'll be in pretty good shape. Until you start making more, then you'll need some more in retirement accounts!

[Hector]

Dont worry much about %.

If you haven't maxed out your Roth contribution for 2010. Max it out. Then put extra toward 2011 Roth. If you max out 2011 Roth, put extra in school plan.

[mass223]

Great advice JPG. Totally aligned with your thinking here. Definitely max the Roth's.

I think this is nor the case when we compare with the economy...JPG I also agree with you...

[JessieHanz]

Based on your income and savings, you can afford to buy even high rise condominium or a real estate.. Nothing is impossible in this world as long as you are doing you or best for your own good sake and for your future and for the future of your family as well..

[couchrobt]

To save together and as a couple, you must be capable of discussing money and spending issues without awkwardness from each other. When you can do that, you can start saving by figuring out your needs, from your wants. That is a good start.