Saving From Age 18-22

**kork13** · 07-23-2012, 04:38 AM

Ccongratulations on the excellent opportunity, and thank you for your strong desire to serve as a fire fighter... I've always had the greatest of respect for them.

You have before you an outstanding opportunity to really get ahead quickly, and very early in your life. Play it smart and you can do very well for yourself. If you can save a total of half your paycheck every month, that's fantastic, and you should definitely strive for it.

The very first thing you need to do is to sit down (probably with your parents) and try to outline what your expenses will be while you continue to stay with them. Are you going to pay them any rent, or offset any of their food or utility costs? Do you have any debt? What does your car cost to drive and maintain? How much do you expect you will spend on food, insurance, eating out, and entertainment? Try to estimate everything as best you can, and this will give you a baseline for the rest of your finances. Now add everything up. Are you able to meet all of your expenses and still save 50% of your income? If so, outstanding. If not, you may want to adjust your savings a bit. As long as you're saving at least 20%-25% of your gross income, you'll be in good shape.

First, you want to start saving for retirement as soon as you start into the job. You should aim to save at least 15% of your gross income toward retirement. At the very least, you should max out a Roth IRA (we can all go into detail about this a little later) with $5000 every year, or $416.66 per month. However, that will only be about 10% the first year, and even less as you get more raises. Will you have a 401k, 403b, or similar retirement account available to you? If so, save into that account up to the 15% level. Does your department still offer a pension plan for retirement? That's great if they do, but just don't rely on it... Retirement is over 40 years down the road for you, and alot can change in that time.

You will also need to save up and maintain a healthy level of readily available cash to cover you in the event of anything unexpected -- this is your emergency fund (EF). Typically, you want to have an amount equal to about 6 months of your expenses saved up as your EF. This will obviously take time, but it should initially be one of your primary savings priorities, right along with retirement.

Beyond those two things, you can start investing and saving for a home with any additional funds you have available for saving each month. Because you're looking at a fairly short timeline for the house (4 years), you should probably put most (if not all) of your house savings into cash accounts like a savings account, money market, or perhaps CDs. You want that money to be there when you need it, so don't take any big risks with it.

The money for investing, of course, you can accept a fair amount more risk. But just because you're young doesn't mean you should be stupid. A smart way to start into investing is to get into a simple S&P 500 index mutual fund. For simplicity, you can open your investment account at the same place you open your Roth IRA. Vanguard, Fidelity, Charles Schwab, and T. Rowe Price are all very good options. You're looking for no-load mutual funds that have low expense ratios (less than .5% total expenses is good, less than .2% is great) and good, relatively consistent returns.

Start with simple investments like the S&P 500, then start educating yourself. Learn about and identify your personal level of acceptable risk, and about what makes a good investment. If you stick around here on these boards, you can keep asking questions and really learn alot. There's also alot of information on the internet, but just be careful that you look for reliable sources that aren't trying to sell you something. Books are good, and if your parents have experience with investing, you can (and should) talk to them as well. The best thing you can do for yourself is to learn. The more you know and the better you understand what you're doing and why, the better choices you'll be able to make.

Good luck, stick around, and keep asking questions -- we're happy to help.

**moneybags** · 07-23-2012, 07:19 PM

Originally posted by kork13 View Post

First, you want to start saving for retirement as soon as you start into the job. You should aim to save at least 15% of your gross income toward retirement. At the very least, you should max out a Roth IRA (we can all go into detail about this a little later) with $5000 every year, or $416.66 per month. However, that will only be about 10% the first year, and even less as you get more raises. Will you have a 401k, 403b, or similar retirement account available to you? If so, save into that account up to the 15% level. Does your department still offer a pension plan for retirement? That's great if they do, but just don't rely on it... Retirement is over 40 years down the road for you, and alot can change in that time.

I know a few firemen that are retired. They have the best pensions, including medical insurance. The jobs they had were union. No need for additional retirement plans.

**GREENBACK** · 07-23-2012, 08:58 PM

Originally posted by moneybags View Post

I know a few firemen that are retired. They have the best pensions, including medical insurance. The jobs they had were union. No need for additional retirement plans.

I definitely wouldn't count on this being the case for younger workers. Fire, police and other public employees are targets for gov't cuts and there is no way I'd rely on their "guaranteed" pension for my retirement 30 yrs. down the road.

**ForeverTex** · 07-25-2012, 02:38 AM

Wow! Thanks for the great (and detailed, I must say) reply! I read every word of it. Very helpful and interesting. Here's some more info I found...

the city doesn't offer a pension plan.

They do offer a savings plan that they consider a "401k qualified plan". I could save up to 10% of my pay for retirement and defer the taxable income until I withdraw it for retirement. the city will match 50% up to the first 5% of my pay. it goes on to say that the money is tax deferred until withdrawn and that my contribution is deducted from my taxable income until I withdraw the funds. - I'm still a little confused as to what this means. I understand I could contribute a max of 10% to this savings account and the city will match 50% (up to the first 5%). When it says that it is tax deferred until withdrawl, does that mean that when I withdraw the money upon retirement, I'll actually lose a good chunk to tax? they say it is a benefit for me to contribute since my contribution is deducted from my current year taxable income...so does that mean I'll pay less tax since i'll be taxed on a lesser amount of money had I not contributed? what is a reasonable amount for me to contribute?

Vesting at 100% occurs at 5 years, they say. It goes on to say that there's a penalty of 10% if I withdraw before 59.5 years old.

Deferred Comp/457 - the city also offers a deferred compensation plan. can somebody give me some pointers on how this works?

TMRS - I believe this is actually my "retirement plan". I have to contribute 6% with the city matching 2 to 1. If I understand correctly, does that mean that I'll essentially have 18% of my income each year (with me contributing 6%) deposited to a retirement account? Is this a good plan?

Thanks! I've got so much to learn. I really appreciate yalls advice.

**JoeP** · 07-25-2012, 05:29 AM

If you can swing it, consider a Roth IRA as well.

**kork13** · 07-25-2012, 05:51 AM

Originally posted by ForeverTex View Post

They do offer a savings plan that they consider a "401k qualified plan". I could save up to 10% of my pay for retirement and defer the taxable income until I withdraw it for retirement. the city will match 50% up to the first 5% of my pay. it goes on to say that the money is tax deferred until withdrawn and that my contribution is deducted from my taxable income until I withdraw the funds. - I'm still a little confused as to what this means. I understand I could contribute a max of 10% to this savings account and the city will match 50% (up to the first 5%).

Excellent. This changes my advice slightly.... The matching by the city is what many call "free money" (and who doesn't love that?). For every $1 you save, you make an immediate 50% return. So you want to save at least up to the amount of the match (5% of your income) into the 401k-type plan. AFTER that, the retirement priority goes back to the Roth IRA. If you do both (maximize your 401k match and max out your Roth IRA), you'll be sitting pretty for retirement. As you slowly receive pay increases, check to make sure you are still saving at least that 15% of your income, and save more in your 401k-type plan or in other accounts (taxable accounts will probably be your last option if your 401k contributions are limited to only 10%....which is surprisingly low).

Originally posted by ForeverTex View Post

When it says that it is tax deferred until withdrawl, does that mean that when I withdraw the money upon retirement, I'll actually lose a good chunk to tax? they say it is a benefit for me to contribute since my contribution is deducted from my current year taxable income...so does that mean I'll pay less tax since i'll be taxed on a lesser amount of money had I not contributed?

All correct. This goes into a moderately involved discussion of taxes, but basically 401k-type (and any other "tax deferred" plans) allow you to pay no taxes on contributed money upfront (when you save it), and lets you delay paying taxes on it until you withdraw it in retirement. It works on the belief that you will be in a lower tax bracket at retirement than you are when you contribute. At first, that probably won't be the case for you, which is why you should prioritize only the "free money", then the Roth IRA, and only after that, maxing your 401k plan. As your career goes on and you make increasingly more money, this will likely become a more valuable benefit for you.

Originally posted by ForeverTex View Post

what is a reasonable amount for me to contribute?

See first quote.

Originally posted by ForeverTex View Post

Vesting at 100% occurs at 5 years, they say. It goes on to say that there's a penalty of 10% if I withdraw before 59.5 years old.

Never ever ever ever ever make early withdrawals unless you literally have nothing else and will go hungry otherwise. This is a terrible option, and I with the government simply wouldn't allow it at all.

Originally posted by ForeverTex View Post

Deferred Comp/457 - the city also offers a deferred compensation plan. can somebody give me some pointers on how this works?

TMRS - I believe this is actually my "retirement plan". I have to contribute 6% with the city matching 2 to 1. If I understand correctly, does that mean that I'll essentially have 18% of my income each year (with me contributing 6%) deposited to a retirement account? Is this a good plan?

I'm not personally familiar with deferred comp, but I think the TMRS **IS** your deferred compensation plan.... and an outstanding one at that. If I correctly understand that participation here is mandatory, that's great and you don't really have to worry about it. All of the other recommendations still apply, but just include this 6% as a part of the 15% retirement savings goal that I've already covered. Keep in mind: "Save 15% for retirement" generally includes ONLY your personal contributions....for the sake of the rule of thumb, ignore any employer contributions (even though in the TMRS case, it's fantastic).

Just to summarize, here's your bottom line retirement savings priorities:
1) 6% of income to TMRS
2) 5% of income (maximum match) to 401k-type plan
3) $5,000/year to Roth IRA
4) Max out 401k-type plan contributions (another 5% of income in your case)
5) Taxable accounts for any additional funds available.
You want to contribute a total of at least 15% of your income, and you'll be sitting pretty in your golden years telling stories to little kids.

**FinancialFreedom** · 08-19-2012, 07:44 PM

I wish the best of luck to you and your fire fighting!

**snafu** · 08-19-2012, 09:50 PM

You've been given terrific advice. I'd like to add please let us now what specific choices you are offered when you begin to participate in the plan as they have different results. We're all happy to offer suggestions about everything financial.

Saving From Age 18-22