Author Topic: Retirement contributions while building emergency savings  (Read 4435 times)

ariapluscat

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Retirement contributions while building emergency savings
« on: July 05, 2016, 10:12:57 AM »
So I just paid off my student loans. YAY!

Now I'm building up an emergency fund. Right now I have less than $1,000 in it. With it being a typical savings account.
How many months of expenses should the emergency fund cover? I feel conservatively 3 months and ideally 6 months. Is this right?

As I build my emergency fund, I'm not contributing to retirement funds. Since I've only been working my job for 3 months, there's no employer match.

Is it reasonable to wait until I have completed my emergency savings and am closer to a employer match to set up deductions in my paycheck towards retirement?

Please keep in mind, I have about $400 in savings atm. So I have a fairly small amount of money to put towards the retirement right now. (Also, I'm not particularly motivated to increase these savings, at least until my apt lease is up since that is the largest expense and my salary is low. Preemptively advice on how to save more than $400 is likely to be ignored lol.)

MyCircus, MyMonkeys

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Re: Retirement contributions while building emergency savings
« Reply #1 on: July 05, 2016, 11:49:40 AM »
Mostly posting to follow, as I have the same question! 

I'm sure most will chime in and say that you should start retirement contributions, at the minimum enough to obtain your employer match (if there is ever one available to you, maybe after 6 months?). I guess if that would never an option, then I would say do what works for your comfort level.  I believe the math says it's usually best to invest, but (in my case at least) it seems that people just out of debt tend to like the comfort of an emergency fund/savings account.  So, I split the difference: currently save $100 a month to an outside account as emergency, and contribute 5% (to meet employer-matched retirement contributions) for both of us. 

ariapluscat

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Re: Retirement contributions while building emergency savings
« Reply #2 on: July 05, 2016, 11:54:59 AM »
Yes, to be clear there is eventually a employer match, but I don't qualify for it until working here for over a year at least.

I do like the split idea, even if it's a very small amount, once I have a large emergency savings. Are there any penalties or thresholds for amount put into a retirement fund?

I'm a bit nervous based on high interest savings having those kinds of thresholds.

OmahaSteph

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Re: Retirement contributions while building emergency savings
« Reply #3 on: July 05, 2016, 01:10:28 PM »
If you're young, I see no issues with putting off 401(k) contributions until you have a decent savings set aside. That said, I'd at least match your employer's contribution when it becomes available, and then when you've got savings, hit your 401(k) HARD. Max out your contributions, etc.

JZinCO

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Re: Retirement contributions while building emergency savings
« Reply #4 on: July 05, 2016, 01:30:24 PM »
Consider using a mixture between cash and a rothIRA or just a rothIRA.
IMO, the best of both worlds.
(1) You can withdraw contributions penalty free if an emergency arises.
(2) You do not miss out on using the contribution space which unfortunately expires annually. If you don't use it, you lose it.
(3) You can choose a low volatility investment to retain the value.
(4) Not a big deal given the low interest environment, but a rothIRA has tax-free earnings while you are working whereas a checking account does not.

Here's an example. Person A has $1000 currently and can save $250 a month. Their goal is $3000 for an emergency fund (e-fund) and they start on 07/16.
- Save $125 to cash and $125 to a low volatility investment in a roth IRA (such as myRA)
- By end of year, they will have put away $750 in checking and $750 into the roth IRA. ($1250 left to go for the efund. And hurray, $750 of space saved into the roth IRA).
    At this point, they will only have $1750 in checking but will have $750 more that is withdrawable, just in case. Not quite to their $3000 but close.
-  In February, they will meet their $3000 goal with checking and the roth IRA combined. But they keep going because they want to move the roth IRA money into the retirement 'bucket'...
- By Oct 2017, they will have met the $3,000 in checking and can now redirect the $2000 in roth IRA into the retirement bucket that will grow! If they had used just a checking account, they would've missed out on $2000 in roth IRA space during that time.

edit: You can always adjust this so that when your 401K employer contr. kick in, you simply redirect some of what-would-be the roth IRA contributions into the 401K.
« Last Edit: July 05, 2016, 01:34:28 PM by JZinCO »

AlwaysLearningToSave

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Re: Retirement contributions while building emergency savings
« Reply #5 on: July 05, 2016, 01:31:25 PM »
In your situation, I would not invest in the 401(k) until I had at least 3 months expenses in savings.  Since you are young (or at least I'm assuming you are young), have only been on the job for a few months, and don't have a ton of wiggle room in your budget, there is significant value in having some cash set aside for whatever comes up.  Young professionals often have lots of life changes, job changes, and other unexpected expenses. 

I might suggest working hard to build your emergency savings between now and the date you become eligible for the 401(k) match.  Ideally, you hit your six months of savings in that time.  If you don't have 6 months in savings by then, contribute the minimum amount necessary to take full advantage of the match, and save the rest for your emergency fund until you hit 6 months of expenses.  If you don't even reach three months of expenses in savings when you become eligible for the match, I would forego the matching entirely until I reached that three-months of expenses milestone.  Use the loss of free money as motivation to reach that three-months-of-savings milestone ASAP. 

ariapluscat

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Re: Retirement contributions while building emergency savings
« Reply #6 on: July 05, 2016, 02:23:53 PM »
Consider using a mixture between cash and a rothIRA or just a rothIRA.
IMO, the best of both worlds.
(1) You can withdraw contributions penalty free if an emergency arises.
(2) You do not miss out on using the contribution space which unfortunately expires annually. If you don't use it, you lose it.
(3) You can choose a low volatility investment to retain the value.
(4) Not a big deal given the low interest environment, but a rothIRA has tax-free earnings while you are working whereas a checking account does not.

edit: You can always adjust this so that when your 401K employer contr. kick in, you simply redirect some of what-would-be the roth IRA contributions into the 401K.

Should I ask my employer about the rothIRA or is that something I should set up on my own?

I didn't know all of this about the roth and the ability to make the deductions without penalty. Thank you so much!

ariapluscat

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Re: Retirement contributions while building emergency savings
« Reply #7 on: July 05, 2016, 02:25:14 PM »
In your situation, I would not invest in the 401(k) until I had at least 3 months expenses in savings.  Since you are young (or at least I'm assuming you are young), have only been on the job for a few months, and don't have a ton of wiggle room in your budget, there is significant value in having some cash set aside for whatever comes up.  Young professionals often have lots of life changes, job changes, and other unexpected expenses. 


Yep I am young! Just 22 and single.
I'm trying to focus on having the 3 months of savings and I'm getting close :D

onlykelsey

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Re: Retirement contributions while building emergency savings
« Reply #8 on: July 05, 2016, 02:25:50 PM »
Consider using a mixture between cash and a rothIRA or just a rothIRA.
IMO, the best of both worlds.
(1) You can withdraw contributions penalty free if an emergency arises.
(2) You do not miss out on using the contribution space which unfortunately expires annually. If you don't use it, you lose it.
(3) You can choose a low volatility investment to retain the value.
(4) Not a big deal given the low interest environment, but a rothIRA has tax-free earnings while you are working whereas a checking account does not.

edit: You can always adjust this so that when your 401K employer contr. kick in, you simply redirect some of what-would-be the roth IRA contributions into the 401K.

Should I ask my employer about the rothIRA or is that something I should set up on my own?

I didn't know all of this about the roth and the ability to make the deductions without penalty. Thank you so much!

Roth IRAs are set up alone, and have nothing to do with your employer.  EdwardJones is the standard around here, and I've found them easy to deal with.  I think Fidelity and CharlesSchwab have some good options as well, though.

EDIT: VANGUARD is standard.  Do not recommend Edward Jones.
« Last Edit: July 05, 2016, 02:36:35 PM by onlykelsey »

Full Beard

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Re: Retirement contributions while building emergency savings
« Reply #9 on: July 05, 2016, 07:45:31 PM »
Congrats on paying off all your loans at such a young age! Keep your expenses low so you don't have to have a big emergency fund, and you can get started on saving for retirement.

JZinCO

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Re: Retirement contributions while building emergency savings
« Reply #10 on: July 05, 2016, 09:59:12 PM »
Consider using a mixture between cash and a rothIRA or just a rothIRA.
IMO, the best of both worlds.
(1) You can withdraw contributions penalty free if an emergency arises.
(2) You do not miss out on using the contribution space which unfortunately expires annually. If you don't use it, you lose it.
(3) You can choose a low volatility investment to retain the value.
(4) Not a big deal given the low interest environment, but a rothIRA has tax-free earnings while you are working whereas a checking account does not.

edit: You can always adjust this so that when your 401K employer contr. kick in, you simply redirect some of what-would-be the roth IRA contributions into the 401K.

Should I ask my employer about the rothIRA or is that something I should set up on my own?

I didn't know all of this about the roth and the ability to make the deductions without penalty. Thank you so much!

Roth IRAs are set up alone, and have nothing to do with your employer.  EdwardJones is the standard around here, and I've found them easy to deal with.  I think Fidelity and CharlesSchwab have some good options as well, though.

EDIT: VANGUARD is standard.  Do not recommend Edward Jones.
I should acknowledge that studies show that people who take out contributions/loans from retirement accounts are much more likely to be repeat offenders and make a habit of it. [On a side note: I don't think that 'cracking the seal' is the trigger that leads to this undesirable behavior but that repeat withdrawals reflect a preexisting tendency towards poor financial behavior.]
So with that said it is considered poor practice to put liquid cash reserves in a retirement vehicle for the average person [though it can be done wisely e.g. https://www.bogleheads.org/wiki/Placing_cash_needs_in_a_tax-advantaged_account], caveat emptor ariapluscat .

You can read about roth IRAs on https://www.bogleheads.org/wiki/Roth_IRA . I've gotten flack for it but I plan on migrating my emergency fund into a myRA over the next couple years because I don't need that space for retirement money but would like to take advantage of it.
« Last Edit: July 05, 2016, 10:00:48 PM by JZinCO »

Lanthiriel

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Re: Retirement contributions while building emergency savings
« Reply #11 on: July 05, 2016, 10:07:56 PM »
I would build your emergency fund. Husband and a I got cocky and bought a house and maxed out retirement in the last year and a half while also trying to pay off student loans. Then he got laid off while we still had about $7k in debt and only $2k in emergency funds. Luckily he got a seasonal job that will allow us to finish up the student loans and save at least a 3 month (and hopefully a 6 month) emergency fund this year. Life happens, and it's a lot easier to deal with when you're prepared.

MoonShadow

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Re: Retirement contributions while building emergency savings
« Reply #12 on: July 05, 2016, 10:24:21 PM »
+1 on using a Roth IRA to store your emergency fund.   Personally, I keep 2 weeks of expenses in my checking account, above and beyond what is needed to actually pay the bills.  (and additional benefit of this is the odds of an accidental overdraft charge are vanishingly small)  And I try to keep at least 3 months of expenses invested conservatively in my Roth IRA.  By "invested conservatively" I mean that they are invested, but in such a way that the odds that their value will drop significantly right when I might actually need them are very low.  Presently, I'm using Harry Browne's Permanent Portfolio for this portion of my invested funds, but I'm considering switching to a forum member's own modification of the PP, called the Golden Butterfly Portfolio.  The reason for using this kind of 'lazy portfolio' for my e-fund, instead of simply a money market fund or some such, is that should I manage to make it to retirement without needing those funds, I want them to have had some respectable gains.  Also, once your contributions have exceeded 125% of your target e-fund value, the odds that a stock market crash would reduce your balance below your e-fund target are almost zero, so keeping those funds in cash is just wasting opportunities.

But then, I have a high tolerance for market risk, so your mileage may vary.

Dicey

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Re: Retirement contributions while building emergency savings
« Reply #13 on: July 06, 2016, 10:32:22 AM »
If you're young, I see no issues with putting off 401(k) contributions until you have a decent savings set aside.
Since the OP is young, I'll explain why this thinking is, um, wrong.

If Person A saves and invests 1K per year from age 20 to age 30, then never adds to it, but keeps it invested and
Person B starts saving/investing the same 1K per year in the same manner from age 30 to age 65, who will have more money at age 65?

If you said Person B, you would be incorrect. The earlier you begin, the more time there is for compound interest to work it's miraculous magic. Creating a low-cost, diversified (i.e. Vanguard, NOT Betterment, EJ, et al) portfolio means that both of them get the best possible result, but Person A still wins by a mile with significantly less input and effort.

So, to answer the OP's original question, read the jlcollinsnh blog series about how to start investing. Save a baby EF of 1K and funnel everything else into investments. After studying jlcollins, you will be able to decide where to put the money. I'd go with a Roth because you have the option of withdrawing from it, but the truth is, as a mustachian, you are far less likely to need to tap it than the average consumer sukka, so don't be put off by the article linked upthread. Also, you don't have to fund a Roth to the max at first. A partially filled Roth bucket is far better than none.

Finally, giant kudos to you for killing the SLs and beginning retirement-type savings so soon in life. Your future (probably FIRE) self will be so amazed at how awesome your present self was.

JZinCO

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Re: Retirement contributions while building emergency savings
« Reply #14 on: July 06, 2016, 11:01:24 AM »
Diane, I don't think anyone is downplaying the importance of investing. Though I would rephrase OmahaSteph's comment to:
If you're cash strappedyoung, I see no issues with putting off 401(k) contributions until you have a decent savings set aside.

The question is about prioritization. Taking a 10% penalty hit on 401(k) withdrawals is nothing to scoff at (though in my post here, there may ways in which it is mathematically advantageous http://forum.mrmoneymustache.com/taxes/trad-ira-vs-taxable-returns-post-tax/msg1025747/#msg1025747).

I do believe we are just advising the OP on priorities at this point in their life.

OP I gave you a strategy earlier. Maybe it would also help to zoom out and review some concepts. I like this diagram:

And description of each step here: https://www.reddit.com/r/personalfinance/wiki/commontopics

Classical_Liberal

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Re: Retirement contributions while building emergency savings
« Reply #15 on: July 06, 2016, 07:20:52 PM »
Don't forget tax rate as the single most important part of this equation.  If OP is in a 25 percent tax rate or more, tax advantaged savings should be a priority over Efund. Simply put, your tax savings ( and growth on that savings) is well worth the risk of having to borrow temporarily for an emergency.   If tax rate is 15 percent or less, then I think it's a coin toss, whichever makes OP feel better, but I would lean towards the ROTH as an Efund suggestion others have offered.

BMEPhDinCO

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Re: Retirement contributions while building emergency savings
« Reply #16 on: July 11, 2016, 02:20:16 PM »
I agree with Classical_Liberal - if you are in the 15% tax bracket, use a RothIRA as a backup EF.  If you are in the 25% bracket, then put into a 401k OR an tIRA to lower your taxes and then also open an EF. 

BUT FIRST, at minimum, get $1k in your EF before you do any splitting between accounts.  That's a minimum.  I didn't feel safe until I had the deductible for my rental insurance, car insurance, and health insurance saved IN CASH.  Then I started putting money into a bigger EF and a retirement account.

Also, figure out what you need for emergency savings - as a single person, esp. if you don't own a house, you can change plans quickly (ie, get a roommate, move closer to work and sell a car, etc) so don't go too far over on the amount - just the basics, no savings, no netflix, anything that can be canceled should not be included (initially). 

biglawinvestor

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Re: Retirement contributions while building emergency savings
« Reply #17 on: July 12, 2016, 09:58:06 AM »
Just chiming in to say that the idea of using the Roth IRA as your emergency fund is a good one. Once the Roth IRA is maxed out, you can then start building an actual cash emergency fund.

As for how to set up the Roth IRA, I recommend you check out Vanguard. Very easy to open the account and low fees.