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Author: thomasbihn One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76384  
Subject: Re: Beginning Retirement Investing Date: 2/18/2013 5:31 PM
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The individual that suggested setting up your emergency fund and paying down debt is spot on.

A few points to consider:
1) Student debt has a very low chance of being discharged in bankruptcy. While nobody ever feels they may run into this, many things can happen where you may find yourself in this unenviable position. It's better to pay down a student loan at 3% than put in an investment at 10% because of this fact alone.
2) If you invest your Roth IRA using conservative investments, you can use it as your emergency fund. You are allowed to withdraw up to the amount you've contributed without penalty. So if you have contributed $5000 and that $5000 grows to $6000, you can still pull out $5000 from your Roth.
3) Money within an IRA is protected from bankruptcy. Let me repeat that. Money within an IRA is exempt from creditors in bankruptcy.
4) Many companies are now offering Roth 401ks as an option.
5) Roth retirement accounts are funded after your taxes have been deducted, but you never pay taxes on the money again.

As a new wage-earner, you are likely in a lower tax bracket than you'll be in 20 years. You definitely want to use Roth over traditional for both your 401k and your IRA. Start by funding whatever the employer match is. If they match 5%, set your allocation to be 5%. If your company offers an automatic increase of 1% a year, sign up for it. If not, be sure to change your contribution amount to increase by at least 1% every year when you get a raise. Depending on how much you have to invest per month, you'll want to probably invest half your available investment money to your Roth IRA and half to additional payments on your student loan debt. If you reach your max for the Roth IRA, put the remaining funds in a money market ETF. I personally like to have about two months of living expenses floating in my bank account to cover short term emergencies and put the rest in taxable investments and my Roth IRA. Once you get to the magical 6 to 9 months of living expenses in your Roth and bank account, put ALL your available investment money (outside of the 401k contribution) into paying down your student loan debt. Once that is paid off, you will be ready to fund your IRA again.

In the strategy I'm suggesting, I recommend only investing in low-yielding, low-risk ETFs in your Roth. If the value goes down, it won't be by a great amount. You will also want to ensure there is a buffer amount there since the prices CAN and WILL sometimes fluctuate down. I recommend 9 months instead of 6 months because of that. I also recommend ETF's because they are generally more liquid. Mutual funds often have additional fees if closed out after a short time period of opening and also generally have minimum requirements that ETFs don't have. After you have your requisite comfort-level in place, then you can start investing new money in the IRA into stocks and stock ETFs (or whatever you feel like).
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