Thinking Before Saving: Why I Changed my Retirement Savings Plan

I realized that financial planning should be active and ongoing.

I’ve been lectured many times about the necessity of having a 401(k) retirement account and about how I should put as much money as I can away now. When I finally landed a job that provided me with one, I immediately upped my contribution from the standard (at my company it’s 5 percent) to a higher percentage of my paycheck, following the advice I’d always been given. I thought that saving this money was the best investment I could make for myself.

About nine months into my first year in the job, I sat down and went over my finances. I saw how much I had contributed to my 401(k) and was happy to see how much money I had been able to save in a relatively short amount of time. Then I saw the return on that investment, which was, sadly, a negative percentage. That meant that in the last nine months, the market hadn’t done so well and my account had actually lost value. I know that saving for retirement is a long game. In the long run, my account will gain that money back, and, the point is that I won’t use any of that money until I retire. But, seeing that the money I’d saved hadn’t actually returned anything for me this year, I started wondering what I could do to see a better outcome.

I reviewed my company’s 401(k) policy. At some companies, employers will match your contributions. This means that you’re essentially getting free money, and with interest. Because of my employee status, my employer does not currently match my contributions (they will after two years). Everything in my 401(k) comes from my paycheck alone.

Because of my company’s policy, I wouldn’t see 401(k) contribution matches of any sort for over a year. With this in mind, I decided that I needed to do further research about how to invest my money in a way that would give me more control, more access, and, build my overall wealth instead of just saving for retirement.

This led me to a Roth IRA. It had been on my radar for a while, but I was waiting to have enough saved to open one (minimum amounts vary from firm to firm, but are generally around $1,000.) At the end of the year, I had saved enough. I wish I had been able to set one up sooner, as it fulfills all my savings needs and even exceeds them.

You can open up and contribute to a Roth IRA as long as you don’t earn over a certain threshold (for 2016, it’s a modified adjusted gross income of $117,000 for singles). You can select where you invest your money personally or with the help of a financial advisor or company, like Vanguard or Fidelity. There is no minimum contribution other than the minimum amount to open the account, and the maximum you can contribute for people under 59 ½ is $5,500 a year.

What I realized is this: If I lowered my contribution amount to my 401(k) just slightly, I would have more money in my paycheck each month and could afford to max out my Roth IRA in the next year. While the money that I was contributing to my 401(k) was pre-tax and making this switch means I’d be taxed on a larger paycheck (and essentially invest less money), the money that goes into a Roth IRA isn’t taxed when I withdrawal it in retirement. This is different than a 401(k) which does require you to pay taxes later. Because of the compound interest that Roth IRAs earn, it’s important to start putting money into a Roth IRA and maxing it out (if you can) as early as possible. Over time, it is possible to see higher returns than with just a 401(k)—especially if your employer doesn’t allow you to pick where your 401(k) is invested. Because a Roth IRA is private, you can decide where to invest your money yourself, as opposed to a 401(k), where your company will decide where to invest your money.

Roth IRAs are great for 20-somethings who want to build their personal wealth and also have a safety net. While the minimum amount to open one is high, it’s a worthy savings goal because you still have access to the money once it’s in a Roth IRA. When you put money into a 401(k), you cannot withdraw it until you reach retirement age without receiving a substantial penalty.

In contrast, with a Roth IRA you can withdraw the money you’ve put into it, with some exceptions. If you’re not of retirement age, you can always withdraw what you’ve contributed to your Roth IRA without taxes or penalties. If you need more than that, you can withdraw the interest, but you have to pay a penalty and taxes on the money. While this isn’t ideal, it’s still accessible to you should you need it. And for me, that’s a big deal right now. Nothing would be worse than desperately needing money and realizing you’ve put thousands into a 401(k) that you can’t touch for another 20+ years without a penalty. If you contribute regularly over time, this money doubles quite nicely as a nest egg and a safety net—two things that are important for young people to have.

While I may not make millions in the stock market with my newfound financial plan, I do feel better having a better hold on my money. I learned a lot about personal finance just in the process of researching IRAs, and that helped me realize that my money could be better allocated to suit my needs right now. It also made me realize that financial planning should be active and ongoing—there are many variables that go into every decision that could change. When my company matches my 401(k) contributions, I’ll have to review their policy and reconsider how much I’m putting away. If they change their policy and allow me greater control of where my 401(k) is invested, I’ll research my options and reconsider. Or, if I get a raise and am able to contribute a higher amount to both my 401(k) and Roth IRA easily, I’ll revise my retirement saving strategy again.

Carmen Reinicke is a Midwestern transplant living her best life in NYC. Sometimes she tweets @csreinicke.

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