We have made A LOT of financial mistakes in our past. Now we're on track and I'm wondering about IRAs, ect.

Question

My husband and I got married at 18 & 21 and we made every bad financial choice you could make. I filed bankruptcy last year and we've been able to make a fresh start. Now I want to do things right and plan for our future. Our credit scores are up, we have most of our bills paid off and we're about to purchase our first home. He's in Iraq right now with the Army and will be home in October, my job while he's gone is to make a plan that we can stick to, and find ways to keep each other motivated to stay on track. Ok, so maybe more info than you needed, but here is my question.
If my husband is 25 now and we start investing $500 per month in an IRA or any other low risk option how much will that be in 40 years when he's 65? I've tried to do the math, but with interest and everything it's confusing and we're far from experts on the subject. We can put away $500 a month and still live comfortably. Or, our savings account through USAA earns 4.8% interest, should I stick with that? Any help?

Answer 1

Good to hear that you're back on track. An IRA is a good way to save for your retirement. Since the current limit is $4,000 per year. You may want to set one up for you and your husband and contribute $250 per month in each. You will be saving $6,000 per year towards your retirement per year. If you are not in a high tax bracket consider setting up two Roth IRAs. You will put money in after-tax, but when you take it out for retirement it will be tax-free.

If you invest $6,000 per year for 40 years below is a estimate of what your combined IRAs will be worth when he's 65.

At 5% about $724,000
At 8% about $1,554,000
At 10% about $2,655,000

You have to figure out with what risk you are comfortable with, but investing too conservatively could cost you and your husband a lot. The 5% will be more or less constant. In achieving 10% per year you can have a down year of 20% or an up year of 20%. But as you can see, over time earning a higher percentage can really have a big impact on your future. You just have to ride out the ups and downs.

Consider Vanguard for your IRAs. They have a wide selection to choose from and are an industry leader.(www.vanguard.com) Or find a good Financial Advisor who can help you set these up. Good luck!

Answer 2

It's good that you're now on the right track. Putting aside $500/month is a good idea. However, your choice of a savings account is not good. Reasons:

1) Inflation is slightly higher than 4.8% interest that you would be gaining from the savings account. So, essentially, you would not be making a real profit, but actually making a loss and wasting away your funds.

I recommend that you look for some investment that will give you a return on investment greater than the current ongoing inflation rate, if you want to see even a minute profit. Also, try and get some financial investment education; it's the only way you'll be able to pick an investment vehicle that you are comfortable with and one that suits your needs. Savings accounts are not a true investment.

Answer 3

My advice is don't worry about the math. The important thing is you'll have plenty. I'd say you should look into broad based index mutual funds such as those offered by Vanguard and Fidelity. Go online and get their phone numbers. They have people who will tell you all about them for free. You're doing what's right by saving. Now take some time and learn how to make your money grow. Don't do anything you're not comfortable with or don't understand. And an IRA is not a low risk option. You decide where the money is put. You can lose money if you do it wrong.
Read some books on mutual funds. You can take a course on investing at a community college. Sounds to me like you're going to do just fine for yourselves.