A $43,000 Mistake?
After much gnashing of teeth, my wife and I have decided to not invest the cash from out savings account in a Roth for 2006. We still have until the April 17th deadline to change our minds but I don’t see it happening.
I feel really guilty not making the deposit and I will be second guessing myself for quite some time on this decision. Fidelity has me convinced that by not making the investment I am passing up about $43,000 at retirement($86,000 for the both of us).
Fortunately or unfortunately, depending how you look at it I can rationalize that either choice will be a good one. Here are my reasons for settling for 5% interest:
- I only recently put my finances back in order. Less than one year ago I had over $14,000 on my credit cards and was still learning the basics of financial management.
- The money in our savings is our emergency fund to help us in the event of an Emergency! By definition we will not be able to plan for it. If we didn’t have any savings we would risk falling back into credit card debt.
- The estimates that Fidelity gives are always too rosy. They don’t account for expenses, bear markets or other realistic events that I will likely have to face before I retire.
- If I were to pay off the remainder of my credit card debt before the 0% offer expires we wouldn’t have enough to max out the Roth’s anyway.
On can argue that the reasons to invest the money are just as good if not better:
- Time is my enemy right now. Barring any unforeseen changes in my career, I will only have about 4-5 more years to contribute to a Roth before my income exceeds the upper income threshold. A nice problem to have but to be ideally diversified between taxable and nontaxable accounts on the withdrawal end, I need to invest in a Roth while I can.
- With the favorable economic environment we have currently I should be able to earn at least twice the 5% I get from parking my cash in savings by placing it in a low cost index fund held in a Roth.
- This is money I shouldn’t need soon anyway so why not maximize its growth potential. Isn’t that what investing for the long term is about anyway. If there is an emergency I can just use the credit card again and play the rate game for a little longer.
Basically it comes down to risk tolerance and at this time with my finances just getting in order, my tolerance is low even though it should be high. You can thank people like me for keeping the markets from being too rational.
On the bright side, I did set up automatic deposits to maximize my Roth for 2007!
