

Ask HN: Save for retirement? - eof

I'll try and skip a big intro.<p>I am 27, after having dropped out of school and dicked off / traveled / had a good time for most of my 20s.. struggled doing free lance web devel stuff for a year and a half, and eventually took a full time job.<p>I make ~55k a year after having lived off ~20 or less for the last few years, I have a few grand in debt (7% apr).<p>Saving for retirement at this point seems like not a great bet.<p>It seems like any meager thousands I could put into an account at this point would be much much better suited to capital for investment / risk taking rather than sitting in a 401k I can't open for 40 years.<p>I don't really have much of a life-plan beyond the next year or so.  But I do expect to make a lot more than 50k a year in the next 40 years.<p>Does anyone else think like this?  I also have been just paying the minimum on cc bills for a while, assuming that in the future they will be 'easier' to pay.
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lhorie
Generally speaking, it's better to pay off your debts first, since their
interest rates are usually higher than the return on any investment you could
make.

Re: risk taking: don't forget, big risk == potential big loss. To figure out
your risk aversion, don't ask yourself how much you're willing to profit; ask
yourself how much you're willing to lose.

Re: expecting to make more in the next 40 years: Young people have a tendency
to overestimate how much they'll make in the future and underestimate how much
they will need (medical bills, for example, generally go up).

Do the math sometime to see how much you'll need to have in your nest egg:
retirement means, almost by definition, supporting yourself for 20+ years with
no monthly salary.

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melling
I guess you haven't read up on compound interest.

<http://en.wikipedia.org/wiki/Compound_interest>

The 401k will compound tax free until you take out the money.

Also, I don't think there is any reason to have any debt beyond student loans
and a home mortgage. You're throwing away money by paying interest on credit
cards.

~~~
eof
I am working off my credit cards now, but delayed them literally years (at the
cost of ~1k in interest) when I was making less money.

I definitely understand compound interest, but it works both ways. If I put 1k
into a 401k _now_ that is 1k is no longer liquid. I think, (and I may be wrong
about this.. but my whole strategy is based off it), keeping that 1k liquid
will offer a higher short-term return.

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spooneybarger
I think this is a question of personality.

Are you more comfortable playing it safe or do you like to take chances and
gamble? If you aren't comfortable gambling/taking chances, save yourself the
stress and put the money in something low risk. As you are still fairly young,
if you aren't risk adverse, swing for the fences.

~~~
eof
I am definitely comfortable with risk at this point. I am not taking any at
the moment really, but I am trying to set myself up to take some big gambles
in the next year or two.

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ndimopoulos
I don't want to sound like a financial advisor because I am not. Your
financials are different than mine but I hope that the below can allow you to
relate so as to choose the best strategy for you.

My approach is a bit more traditional. I take each salary as the static factor
(i.e. I will not get a raise in the future). This way if I get more money
later on that would be a good surprise, otherwise I have my plan set.

The key factor for you at the moment is to get out of debt - all debt. I sat
down and wrote my income. Then from that I subtracted the necessary expenses
i.e. rent, utilities, transportation etc. I also subtracted a relatively small
amount for food allowing a bare minimum of eating out and socializing. I cut
all unecessary expenses and then paid the bare minimum on all of my loans and
whatever was left was the money that I could spend on anything. Let's assume
for a moment that this amount was $500.

I then opened a savings account and put that $500 there. I did the same thing
for the next 3 months until I ended up with $1500. That money served as the
immediate emergency fund. The number is arbitrary and I have since increased
it to $2000. Your interpretation will depend on your own situation.

Say you had a problem with the car, unexpected expenses etc. - that is the
fund that would help you get out of a very unpleasant situation later on. So
if you needed say $200 for a car repair you could get it from there but you
would replenish that amount as soon as you can. The emergency fund would need
to have $1500 at all times. This gives you also a sense of accomplishment and
security.

Once I had that done, I started attacking all the credit cards and loans. I
started with the first one, the one that had the lowest amount. Once I paid
that off, I went to the next one, the next one etc. Once everything was gone,
I made sure that whatever I would spend I would be able to pay it off the next
month. This way I would never pay any APR and would use my money for myself.

The next step would be to set up a 401K. A Roth IRA would be a nice place to
start and you can choose a conservative strategy to minimize your risk. After
this is set up, you will need to start setting a long term emergency fund.
This would help you in the chance you lose your job and have nothing. Some
people set aside 3-6 months of pay to help with any layoff. If this is set up,
you will be able to pay your bills for 3-6 months and have a bit of time to
find another job.

My point is that you cannot rely on the future since you do not know what will
happen. Work with what you have today and you will be better off in the
future.

I hope the above helps.

~~~
bolu
I am better versed in the investment area than in the personal debt area, so I
will let others speak to that. But a couple of thoughts on the investments
front:

1\. In many ways it is about time horizon. If you are sure that you will not
need access to the funds in the short term (conservatively, in the next 10
years) then you can invest in high risk vehicles. But remember, this is not
necessarily because the funds are in a 401(k) or IRA account where there is a
large early withdrawal penalty, but also because high risk instruments could
have fallen greatly in value at the time you need the funds, and if you have
to withdraw them at that time you’re forced to take a large loss.

2\. If you think you have a long time horizon make sure to do the math to
actually be sure - ndimopoulos’s advice above about having an emergency fund
is good.

3\. If you have a long time horizon, there is no need to discount 401 K plans
and IRA plans. Tax-free growth, or tax deferred growth as depending on which
flavor you choose, is an amazing thing.

4\. If you’re really interested in extremely risky investments in an effort to
expose yourself to the largest upside, there’s been some recent work around
lifecycle investing where some relatively well respected academics are
proposing a model that includes some small amount of leverage for folks who
have a long time horizon and a large amount of risk tolerance. This will road,
if you choose it, bears quite a bit of research before you start. Take a look
(as a start) at [http://www.amazon.com/Lifecycle-Investing-Audacious-
Performa...](http://www.amazon.com/Lifecycle-Investing-Audacious-Performance-
Retirement/dp/0465018297)

5\. Remember that being rational with money is a lot easier when its not yours
and when it’s not decreasing rapidly. It probably bears some effort on your
behalf before jumping into any high risk investments to project yourself into
the future and understand how you would feel if your life savings drop by 50%
or even 80%. Make sure that you’re OK with this.

Just a couple of thoughts, hope this helps.

P.S. I am the cofounder of the recently launched YC Summer 2010 company
FutureAdvisor. Our current product targets specifically optimizing an existing
portfolio, so not much help in this situation, though this is definitely a
scenario we hope to support in the future. Thanks for sharing your story, it
helps us understand what folks might need out of a investing product.

(written with the aid of speech recognition, please excuse the occasional
bewildering error)

