how to choose a retirement strategy – or not
Are you the type of person who gets excited about new ventures? Do you like a challenge? Many people have an ‘ah-ha’ moment when they decide to get out of debt, start living a frugal lifestyle and aim towards financial freedom instead of pursuing the accumulation of stuff. One more pitfall exists early on in this process: over-thinking choices like the Roth or the traditional IRA.
There are differences, of course, and enough has been written about them that I’ll summarize it in one sentence: the traditional IRA is not taxed, but is taxed when you withdraw it; the Roth IRA is taxed now, but not when you withdraw it; both grow tax free. There are many subtle differences beyond that simplistic description. Income limits may alter the favorability of one over the other. The point most people miss, though, is that your choice doesn’t matter that much until you have a lot more money than most of us have.
You can find similar situations all over the place. Should I invest with HSBC or ING? What’s the best brokerage? Should I have 3, 6, or 12 months of emergency funds? What your decision is seldom matters as much as when you make it. I recently took the advice of a well-known semi-personal-finance blogger and opened up an interest-bearing checking account. I resolved to switch all of our checking from a large bailout bank to this interest-bearing checking account, chasing 1.5% interest on our cash. What happened? After 6 months of inconvenience, confusion and frustration I shut down the interest-bearing account. The effort to move the money, change all of the direct deposits, automatic payments and so on simply wasn’t worth it compared with a return of less than $75 per year. We have kept a low balance in our checking account for years, choosing to move excess cash to an interest-bearing online savings account. The 1.5% – which sounded so much better than 0% – simply wasn’t worth it.
I worried that I was leaving money on the table, and consequently took time away from other, more important matters to chase $75. Spending time worrying about your retirement strategy can be almost as ridiculous. You’ll see a lot of advertisements for brokerages advertising the lowest fees on trades, for example. If you’re just starting out, find a low-fee brokerage and go with it. But if you opened one up years ago (as I did) that charges $8.99 per trade, don’t bother to switch to a lower-cost brokerage. As long as you aren’t a day-trader, you’ll be fine.
Much like the moment in The Matrix when Neo suddenly becomes aware of the ‘real world,’ many people have a moment of ‘financial awakening‘ that suddenly makes the world look like a little green-neon-streaming series of percentages and dollars and cents. The important thing is to learn to see beyond the numbers and realize that chasing more money is not, and never has been, the goal. What we are really chasing is time. Anyone can use time to accumulate money; the real trick is using your money to buy back time. Agonizing over strategy rather than taking the offensive is a good way to lose the game.