In this video, I talked about which one to prioritize first.
I get asked this question a lot during my coaching sessions so I thought I'll post a video about it.
In general, I don't go by the way most websites determine how much you'll need to retire, which is based on income. I determine when you are able to retire and how much you'll need based on your current average expenses. For example, if you are spending average $3K a month, which is $36K annually. Let's round that up to $40K. Then we add that yearly plus the 2% or 3% inflation rate and keep doing that till your life expectancy. Then add up the total from the time you plan to retire (ex. age 60 / 65 till maybe you are 80 or 90). See if you can get to that number from now till then. If you need help figuring out if you can retire, I can coach you through this. You don't have to do this alone.
I could never be thankful enough for having such a wonderful aunt who is so smart with money. She encouraged me to open a Roth IRA account when I first immigrated here in the US at the age of 20. I remember thinking when she first suggested that to me 'Why the heck am I thinking and saving for retirement already this early? I am too young to think about retirement!' but I trusted that she always have our best interest at heart so I listened to her advise. Boy, I am so glad I did! I have been maxing out that account since I started except for one year when I felt rebellious and decided not to. I didn't know anything about investments then, nor what stocks to buy or what the heck even a market means. Luckily, my aunt knew enough to advise me on what to invest on and I bought the companies she advised me to. Fortunately, the ones that she had me buy were really great companies that have grown in value and is still continuing to grow in value that I plan to hold for awhile.
So why all this fuss about Roth IRA? The simplest answer is because you need different buckets of income during retirement. There is the taxable bucket and the non-taxable bucket. Roth IRA falls under the non-taxable bucket so you can withdraw a million dollars (hopefully you will have at least that much), you will NEVER incur any taxes on it. It is a place where you can put your after-tax money now and EVERYTHING inside the Roth will grow tax free so when you retire, everything you withdraw will never be considered as income. Retirement is a whole other set topics to talk about since there are many different strategies one can do to make sure you don't run out of money when you retire. I can't stress enough that it is never too early to plan for your retirement. Invest now!
To break it down for you, it is NEVER TOO EARLY to start a Roth IRA. Nor is it ever too late! If you know your AGI (Adjusted Gross Income) is going to be less than $117k (for the year 2016), you are fully eligible to max the $5,500 annual contribution. If you can afford to transfer $100 there every month, please do so, some money is better than no money transferred and make sure to invest it in the market since you won't be touching the money till you retire.
If you need guidance with planning for your retirement, please do not hesitate to contact me for a free initial consultation and we can talk about how best I can serve your financial needs and goals. Please refer to the Contact page for my contact information. Thank you.
Teh Financial Coaching
My dream is for all my clients to attain Financial Freedom