It’s not just how much you save, it’s when you save that matters. The best time to start is now. This is the power of compounding returns, which this single chart will help you visualize:

• Susan (grey) invests $5,000 per year from age 25 to 35 ($50,000 over 10 years) and stops.
• Bill (green) invests $5,000 per year from ages 35 to 65 ($150,000 over 30 years).
• Chris (blue) invests $5,000 per year from ages 25 to 65 ($200,000 over 40 years).

You’ll note that Susan still ends up with more money than Bill, even though he invests three times as much money over 30 years, all because Bill starts late. Susan and Chris start out the same, except that Susan stops after 10 years while Chris keeps going. Chris only invests $100,000 more than Susan, but ends up with $500,000 more money in the end. A 7% annual return is assumed.

The chart is from a JP Morgan slide deck for their asset managers, via Business Insider.

I’m also reminded of Warren Buffett and his Snowball biography – “Life is like a snowball. The important thing is finding wet snow and a really long hill.”

Updated. In my post Roth IRA Contribution vs. Emergency Fund Savings, I suggested that people should just fund their Roth IRAs first over an Emergency Fund. Why? If you contribute $5,000 in a Roth IRA, you can take out $5,000 later with no tax or penalty – be it one day later, one week later, or one decade later.

For supporting evidence, you will have to wade through IRS Publication 590. First, we head to the Roth IRA section, specifically the subsection called Are Distributions Taxable?. Here, the first sentence states:

You do not include in your gross income qualified distributions or distributions that are a return of your regular contributions from your Roth IRA(s)

Sounds pretty clear, but let’s keep looking. The next section talks about qualified distributions, like those made after you turn 59.5, which are definitely not taxable. We are given this decision flowchart (Figure 2-1), and… whoops, we may not even pass the first box. Taking out your contribution within the first 5 years is not a qualified withdrawal. 

But wait. Not all unqualified withdrawals are taxable. Going to How Do You Figure the Taxable Part?, we are directed as follows:

To figure the taxable part of a distribution that is not a qualified distribution, complete Form 8606, Part III.

Here is a link to Form 8606 [pdf] and the Form 8606 instructions [pdf].

Here’s how you would fill out the form for the simple situation of taking out former Roth IRA contributions. On Part III, Line 19, you would include the money you took out as a distribution – “Enter your total nonqualified distributions from Roth IRAs in 2013”. This would carry over to line 21. But then on Line 22 you would “Enter your basis in Roth IRA contributions”. Line 23 tells you to subtract the difference (21 minus 22). If you are taking out less than you formerly contributed over the years, your net taxable amount would be zero.

What about a possible 10% penalty? In the section on the penalties Additional Tax on Early Distributions, we see this:

Unless one of the exceptions listed below applies, you must pay the 10% additional tax on the taxable part of any distributions that are not qualified distributions.

Since this unqualified distribution of a former contribution is not taxable, there is no “taxable part” and thus no penalty to worry about.

In conclusion, although taking out a former Roth IRA contribution as a distribution may be (1) an unqualified distribution, it is also (2) not taxable and (3) not subject to any additional penalties. When subsequently filing your taxes, remember to fill out IRS Form 8606 as indicated above so show the IRS that you are only taking out your original basis.

Now that the dust has settled a bit, here’s a quick breakdown of the newly-announced myRA based on the description “simple, safe and affordable starter retirement savings account”.

• Simple = Direct payroll deduction. myRA will be funded directly through paycheck withholding, likely using the same infrastructure used to buy savings bonds via TreasuryDirect. No employee match. No bank account required. One investment option.
• Safe = Government-backed principal protection. The only thing you can buy in the myRA is a security identical to the G Fund of the Thrift Savings Plan available to federal employees. First, it has a principal guarantee so that your balance will never go down. Second, it pays interest based on the weighted average of all treasuries with maturities 4 years or more (2.5% as of January 2014). So it has the higher interest you’d get from owning longer-term bonds without the risk of loss.
• Affordable = Low contribution requirements. Minimums of $25 needed to start, and $5 per paycheck for future contributions.
• Starter = Temporary and small. Must be rolled over to a “regular” Roth IRA held at a private custodian when the account value reaches $15,000 or after 30 years.
• Retirement account = Structured as a Roth IRA. The myRA is a Roth IRA with the US government as the custodian, as opposed to a private company like TD Ameritrade. Account grows tax-deferred, and qualified withdrawals at retirement are tax-free. Same contribution limits ($5,500 for 2014) and same income limits ($129k MAGI for single, $191k MAGI for couples in 2014).

I would also add that it is not available yet, and will only be coming to select employers in “late 2014”. The goal is to be available to all W-2 employees via payroll deduction eventually, but that is unlikely to be earlier than 2015. For a more in-depth discussion, I liked this article by Michael Kitces at Nerd’s Eye View.

Much like modern car manufacturing, this is an attempt at fashioning a “new” retirement vehicle using existing parts from other models. Why? The President had to piece this thing together using executive order instead of pushing new legislation through Congress.

Will myRA entice people who currently aren’t saving for retirement? I like the ease of paycheck deductions and the idea that you’ll never lose money. But the overall package just isn’t exciting enough. There is no buzz. People are not clamoring to sign up right away. Instead of just 4+ year Treasuries, it should offer both a principal guarantee and the highest interest rate of any US bond (30-year Treasuries?). Make it as attractive as possible.

Target date funds (TDFs) get their name because they adjust their portfolio holdings automatically over time based on a given target retirement date. In general, this means shifting from mostly stocks to less stocks over time (known as the “glide path”). TDFs continue to grow in popularity, especially within employer-based plans like 401k’s and 403b’s.

Morningstar Fund Research recently released its 2013 industry survey, Target-Date Series Research Paper [pdf]. While it feels targeted at financial professionals, there are some good nuggets for us individual investors looking to decide where to invest. For example, we have to be careful as look how widely the glide path can very between different brands of target funds:

(click to enlarge)

While the most popular TDF providers have much more similar glide paths, they still differ in important ways (especially after retirement age).

(click to enlarge)

Other highlights from the paper:

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Updated and revised 2013. You often hear that stock investing is a sure thing over the “long run”. But as this chart from the NY Times and Crestmont Research shows, there is still a lot of variability involved. The matrix below visually displays the annualized returns for the S&P 500 for every starting and ending year from 1920 to 2010, adjusted for inflation, taxes, and transaction costs.

(click to enlarge)

Your actual returns depend a lot upon when you start, and also when you finally withdraw:

After accounting for dividends, inflation, taxes and fees, $10,000 invested at the end of 1961 would have shrunk to $6,600 by 1981. From the end of 1979 to 1999, $10,000 would have grown to $48,000.

“Market returns are more volatile than most people realize,” Mr. Easterling said, “even over periods as long as 20 years.”

Some further observations:
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I’ve written about how recent fee disclosure requirements for 401(k) retirement plans have brought a spotlight on bad 401k plans and their potentially embarrassed plan sponsors.

But after reading the fee disclosure on my wife’s own 401(k) plan, I must say that I’m now thinking that maybe nothing really happened at all. Check out what mine says under “Potential General Administrative Fees and Expenses”:

Administrative Fee – Per Account When applicable, other general administrative fees for plan services (e.g., legal, accounting, auditing, recordkeeping) may from time to time be deducted as a fixed dollar amount from your account. The actual amount deducted from your account, as well as a description of the services to which the fees relate will be reported on your quarterly benefit statements.

Translation: We might charge you some fees. We might not. Helpful, eh?

There’s more:

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An important tenet of portfolio construction is diversifying between stocks and bonds. While poking around on Morningstar, I stumbled across a quick real-world example of how this works.

Let’s say you had $10,000 back on January 1st, 1993. Now, let’s see how that money would have grown over time until today (August 9, 2013) depending on what you invested it in. That’s means holding over a 20-year period – that’s 20 years of bubbles, crashes, euphoria, fear, and a constant flow of bold predictions and catchy newspaper headlines.

1. Vanguard Total Stock Market Index Fund, Investor Shares (VTSMX).

Let’s say you invested in this huge, popular index fund that passively tracks the entire US stock market. (See What’s Inside the Vanguard Total Stock Market Index Fund?) From afar, you may be happy with this chart. But having lived through it, I can say that it was quite a wild ride. People tend to remember the highest value of their portfolio. Your money would have grown to $37,000, only to fall all the way back to $23,000 in the Tech Bubble Crash (a 38% drop). Later, your $46,000 would have dropped 50% all the way to $23,000 during the Housing Bubble Crash. So between 2003 and 2009, your money would have gone nowhere even as inflation rose. Many people went to cash. But if you stuck it out, today you’d be sitting on a balance of $58,621.

2. Vanguard Total Bond Market Index Fund, Investor Shares (VBMFX)
Now, what if you invested in this fund that tracks the overall US bond market?

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