Should I Pay Off My Student Loans Or Invest? Here’s How To Decide

Student loans in America average near the $40,000 mark, and it makes it difficult to decide whether to invest or pay off student loans. Because, let’s face it, getting out of debt and saving for retirement is equally as important. 

Pay down debt or invest? Factors to consider 

There are three elements that determine which route will suit your needs best. These are: 

• The mathematical approach: Using math, you can figure out what will be more beneficial – paying down debt or using extra cash to invest. For example, if you have a higher interest rate than what you’re earning on your investment, you might opt to pay off the debt first. But math isn’t the only important factor at play.
• The emotional approach: Having student loans looming over your head sucks, and it’s only natural to want to get rid of it. The emotional decision might lead you to a decision that makes you feel better, even if it doesn’t make as much sense financially. 
• A hybrid approach: With the hybrid approach, you do both – pay down debt while simultaneously saving for retirement. But this approach deserves some investigation to make sure your split has the best possible result – we’ll get into those nuances in this article.

But before you dive in, it’s important to understand external factors may affect your decision. 

Your personal financial position 

A critical factor in deciding whether to pay down your debt as opposed to boosting your retirement savings is the effect the move will have on your finances. Things to consider, include: 

• Emergency savings: It’s important to have money tucked away for a rainy day. These funds need to be instantly accessible and are used in the event of a financial crisis. While financial pundits may recommend a good three to six months’ worth, our founder Ramit Sethi considers 12 months’ worth of emergency savings a safer option. Your emergency savings need to be topped up first before you can start paying additional funds towards debt or investments. 
• Payments up-to-date: If you happen to be behind on any of your debt, it’s better to get back on track before adding money to an existing installment. This is because those arrears can wreak havoc on your financial standing with your bank and other service providers. It can also wreck your credit score. 
• Your basic needs are met: While long-term plans such as debt repayments and retirement planning benefit from added payments, it’s important that immediate needs are seen to. This includes housing, food, transport, and utilities. 
• You still have fun money: When you’re not able to do any of the things you love, the road to financial freedom becomes a dreadful journey. Choose something that you’re happy to save some guilt-free spending on. This amount can increase as you start ticking financial goals off your list. 

Bonus: Making more money can help you get out of debt faster while still having room to invest. Learn how by downloading our FREE Ultimate Guide to Making Money

The amount of your debt 

The average student loan debt of $40,000 might seem doable, especially if you’re earning a decent paycheck. But let’s consider those specialist degrees where your student loans creep up to the hundreds of thousands of dollars. Suddenly this amount seems like a behemoth and it might not make sense to throw money at anything else until you get this huge number under control. 

The flipside is that with all those years you devote to paying off your student loans, you could have built up your retirement savings. You may want to predetermine a goal that will give you some wiggle room to focus on investments. For instance, you might set the goal that once you reach the halfway mark of your debt, you’ll start contributing to your retirement accounts. 

Remaining years

If you’re right at the beginning of the loan period, for instance, fresh out of college and working that first job, your priorities might be different to someone close to retirement. 

The cost of your finance 

There are only a few instances where the debt interest rates are lower than what you would earn on an investment, but it happens. When it does, you want to make sure that you’re getting the best value for money. A low-interest rate student loan might just be better off with that minimum installment if you haven’t maxed out your 401(k) just yet. 

However, if the interest you’re paying is on the higher end, you might want to consider paying your debt first before increasing your investment contributions. 

Student loan options – which one’s yours?  

Fast-tracking your student loan payments can save you a stack of money in the long term. 

For instance, an extra $100 goes a long way to clearing off the interest portion faster. 

Here’s an example. Let’s say you have a $10,000 student loan at a 6.8% interest rate with a 10-year repayment period. If you go with the standard monthly payment, you’ll pay around $115 a month. But look at how much you’ll save in interest if you just pay $100 more each month:

Monthly payments	Total interest paid	You save
$115	$3,810	$0
$215	$1,640	$2,169
$315	$1,056	$2,754
$415	$728	$3,027

It’s worth knowing that there are a number of options open to those who wish to pay off their student loan debt. 

Understanding the type of loan that you have (or are planning to take on)

There are three student loan types to consider: federal, private, and refinance loans. Each has its own set of rules and carries a few pros and cons. 

A big plus across the board, however, is the fact that you can pay extra or make prepayments into an education loan without penalty charges. How’s that for an incentive? 

Federal student loans 

The government makes provision for loans for students in order to access higher education. Instead of students borrowing from banks and other financial institutions, these loans are entered into with the federal government. 

There are three types: 

• Direct subsidized – suitable for students who need financial assistance.
• Direct unsubsidized – no need to prove financial need, available to all applicants. 
• PLUS loans – these loans are for graduates and professionals to cover the shortfall of tuition not covered by other programs. You will need a good credit score, and these loans have a higher interest rate than other federal student loans.

Positives include that it’s easier to apply for a federal loan and in times of hardship, there are deferral and forbearance options. They also tend to offer lower interest rates as the rates are controlled by the government. 

It’s important to note that these loans carry costs and charge an initiation fee of 1.057% to 1.059% for regular student loans and 4.228% to 4.236% for PLUS loans. 

Private student loans

There are a number of private student loan products offered by banks and other institutions. What’s great about these loans is that they can tailor the loan type to suit the need, for instance, there is a loan for bar exams, another for medical school, and even a product for those with bad credit. 

These loans tend to be a little more costly and while there aren’t initiation costs, the interest rate is not fixed by the government. This means that the rate can be substantially higher than that charged on federal loans. 

Applicants will also need to show a good credit score. It’s also worth knowing that these loans aren’t part of any government forgiveness programs. So why get it at all? Turns out these loans are great for those who have high study costs. 

Student loan refinance 

High-interest rates on a student loan are a real kick in the teeth and what better way to get your own back than by opting for a product with a lower rate? Student loan refinance products are offered to students who have a decent credit score with the aim of reducing their interest rate. This is not a great option for those with federal loans, however, as you will lose the federal protections and benefits should you opt to refinance. 

Bonus: Ready to ditch debt, save money, and build real wealth? Download our FREE Ultimate Guide to Personal Finance.

Your retirement options 

Saving for retirement is an essential component of building wealth. It also happens to have tax and other benefits that you simply can’t get from regular savings or investments. But how do you make the decision to pay your future self when you still have debt? It will be easier to unpack that mule of a question when you understand retirement investment options a little better. 

Roth and Traditional IRA

These retirement plans allow you to contribute to your retirement savings up to a certain threshold per year. In 2020 and 2021, this annual threshold was $6,000. That means that if you’re worried about paying off debt or saving towards retirement, first check that you’re not already maxed out on these contributions. 

It’s worth noting that a Roth IRA also has an earnings limit of $140,000 for individuals. 

401(k) 

There is no cheaper way to fund your retirement than a matched 401(k). Read that again. If you have extra cash lying around and you’re not maxed out on this, you’re losing out. Let’s explain. 

A matched 401(k) means that your employer will match your 401(k) contributions either fully or partly up to a certain percentage. Now just bear in mind, there is a limit of just under $20,000 per year, or 100% of your salary, whichever is the smallest. 

How to pay down debt while investing 

Know what your financial position is 

Okay, we’ll admit it, you’re going to have some work to do. But a little bit of effort now will save you a ton of financial admin in the future. There are a few things you need to know before you can make a decision about whether to pay student loans or invest. 

• What is my outstanding debt? You want to check the installments, when your last installment is due, and what the settlement amount is. This may seem like a no-brainer, but there’s a surprising amount of people who prefer to play ostrich to their debt. They’re either scared that the debt is more than they thought, or they’re embarrassed to admit that they’re probably net negative (which means their debt is more than their assets, yikes!). But here’s the thing, no one cares (or will for too long). Also, it’s not going to go away just because you don’t want to think about it. 
• Which item has the highest interest rate? Who knows, your student loans might be the least of your concern. Check credit card and personal loan details too to make sure you’re focusing on the right debt. If these are off the charts, you might be a good candidate for debt consolidation. 
• What am I paying each month? We want you to be conscious about your spending. You need to know what your fixed expenses are, what you’re spending on savings and investments, all your fun money, and yes, it’s important to own up to those monthly subscriptions that you haven’t used in over a year. 

Bonus: Ready to ditch debt, save money, and build real wealth? Download our FREE Ultimate Guide to Personal Finance.

Use the envelope system 

An envelope system is a budgeting tool that allows you to allocate all your money to payments, savings, and such. It works on the premise that, if you had cash, you would stick your dollar bills into various envelopes and then mail them off to cover the bills. 

An envelope system works well because you decide the categories. While housing and utilities are a given, you can also have an envelope for lattes, entertainment, etc. Sure, you can decide that the biggest chunk of your salary goes to Target, but the point is to cover your expenses and bills, put aside money for saving and investing, and still have some fun money. 

When you’ve used all your entertainment money, the idea is that it’s done. When the envelope is empty, that’s when you stop. Not only will this allow you to allocate more effectively, but it will also stop the frustrating overspending that seems to befall us when we’re low and there’s this great pair of shoes… stop!

Now, here’s the great part. You can have an envelope for additional payments to your student loans AND you can have an envelope for investments. 

Choose investment options that suit your pocket 

When you have to ask the question, “Should I pay off my student loans or invest?” chances are good that you’re not interested in spending a ton of cash on fees and expensive investment products. 

You have two enormous financial goals and the quicker the better. That means you’re going to need options that will allow you to do both. 

So out comes Ramit Sethi’s Ladder or Personal Finance. It’s a gamechanger when it comes to building wealth and vanquishing debt. And here’s how it works: 

• Get that 401(k) going: It’s cheap investing and your future self will thank you.
• Slash the high-interest debt: High-interest debt just sticks around for too long. Boost your repayments to get this down fast.
• Contribute to a Roth IRA: Retirement is cheap investing, oh wait, we said it already. But hey, if it’s true it’s true.
• Max out your 401(k): You want to get the most out of this product! 
• Diversify your portfolio: Start looking at other investment products such as stocks, CDs, and bonds.

The bottom line 

Let’s face it, student loans are a drag. It’s only natural to want to get rid of them ASAP. But here’s the thing, we’re also getting older. Investing shouldn’t be relegated to some future date when things are peachy and the debts are done. 

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Should I Pay Off My Student Loans Or Invest? Here’s How To Decide is a post from: I Will Teach You To Be Rich.

Via Finance http://www.rssmix.com/

What is a diversified portfolio? (with examples)

When it comes to building the best investment portfolio, you’ll often hear that diversification is key. But what does that even mean — and why do you need to bother with it? After all, you already own a wide range of stocks, from that skyrocketing Amazon stock to your Apple and eBay stocks, and you’re raking in the profits. What could go wrong?

If you’re relying on a portfolio filled with big tech stocks or energy stocks to get you through to retirement — or if you’re banking on picking the right stocks forever — you may be in for a surprise during the next market downturn. It’s pretty easy to pick the “right” stocks with the market is overvalued. But, when a market correction happens, you’re probably going to be wishing you’d paid more attention to the advice about diversification.

If you want to build wealth and make the right moves for your investments, you need to build a diversified portfolio. 

What is diversification?

Have you ever heard the saying, “Don’t put all your eggs in one basket?” That’s the same principle that drives investors to diversify their investments. 

When you diversify your investments, you spread your money out across different investment options to lower the risk that comes with investing. In other words, investors use diversification to avoid the huge losses that can happen by putting all of their eggs in one basket. 

For example, when you diversify, you allocate a portion of your investments to riskier stock market trading, which you spread out across different types of stocks and companies. When diversifying, you also put money into safer investments, like bonds or mutual funds, to help balance out your portfolio.

The idea behind diversification is that you avoid relying on one type of investment or another. When one of your investments takes a tumble, the others act as a life raft for your money, providing solid returns until the riskier investments stabilize. 

Bonus: Ready to learn more about investing? Download our FREE Ultimate Guide to Personal Finance.

Why is diversification important?

A lack of diversification can cause big trouble for your money. That’s because:

• Investing with the main goal of making money immediately is an easy way to lose. Anything can happen in the future. Stocks tumble, markets crash, and fluctuations and corrections happen. 
• It’s not enough to diversify the types of stocks you invest in, either. You want to focus on different types of stocks, not just tech or energy stocks, but if the whole market takes a downward turn, or if a correction happens, you need other investments to help balance it out.
• Having a variety of investments in your portfolio is the only way to balance out market downturns. If you don’t diversify, you’re banking on the idea that your investments will always pan out the way you want them to. And, if you ask any seasoned investor, that’s not the best plan. 

Let’s say that you think tech stocks are the future. The tech industry is growing at a monumental pace, and you’ve been lucky with your tech stock purchases thus far. So, you take all of your investment money and you dump it into buying stock for large-cap tech company stocks.

Now let’s say that the tech stocks have a steep uphill trajectory, making you tons of money on your investment. A few months later, though, bad news about the tech sector makes headlines, and it causes your cash-machine stocks to plunge, losing you tons of money in the process. What recourse do you have other than to sell at a loss or hold and hope they recover? 

Now, let’s say you invested heavily in large-cap tech stocks, but you also invested in small-cap energy stocks or medium-cap retail stocks, as well as some mutual funds, to balance it out. While the other types of investments have lower returns, they’re also consistent. 

When your sure-thing tech stocks take a nosedive, your safer investments help to protect you with ongoing returns, and you can better afford the losses from the riskier investments you made. That’s why diversification is important. It protects your money while letting you make riskier investments in hopes of bigger rewards.

Diversification breakdown by age

Diversification is important at any age, but there are times when you can and should be riskier with what you invest in. In fact, most money experts encourage younger investors to focus heavily on riskier investments and then shift to less risky investments over time. 

The rule of thumb is that you should subtract your age from 100 to get the percentage of your portfolio that you should keep in stocks. That’s because the closer you get to retirement age, the less time you have to bounce back from stock dips.

For example, when you’re 45, you should keep 65% of your portfolio in stocks. Here’s how that breaks down by decade:

• 20-year-old investor: 80% stocks and 20% “safer” investments, like mutual funds or bonds
• 30-year-old investor: 70% stocks and 30% “safer” investments, like mutual funds or bonds
• 40-year-old investor: 60% stocks and 40% “safer” investments, like mutual funds or bonds
• 50-year-old investor: 50% stocks and 50% “safer” investments, like mutual funds or bonds
• 60-year-old investor: 40% stocks and 60% “safer” investments, like mutual funds or bonds
• 70-year-old investor: 30% stocks and 70% “safer” investments, like mutual funds or bonds

Diversification vs. asset allocation

While asset allocation and diversification are often referred to as the same thing, they aren’t. These two strategies both help investors to avoid huge losses within their portfolios, and they work in a similar fashion, but there is one big difference. Diversification focuses on investing in a number of different ways using the same asset class, while asset allocation focuses on investing across a wide range of asset classes to lessen the risk. 

When you diversify your portfolio, you focus on investing in just one asset class, like stocks, and you go deep within the class with your investments. That could mean investing in a range of stocks that have large-cap stocks, mid-cap stocks, small-cap stocks, and international stocks — and it could mean varying your investments across a range of different types of stocks, whether those are retail, tech, energy, or something else entirely — but the key here is that they’re all the same asset class: stocks.

Asset allocation, on the other hand, means you invest your money across all categories or asset classes. Some money is put in stocks and some of your investment funds are put in bonds and cash — or another type of asset class. There are several types of asset classes, but the more common options include:

• Stocks
• Mutual funds
• Bonds
• Cash

There are also alternative asset classes, which include: 

• Real estate, or REITs
• Commodities
• International stocks
• Emerging markets

When using an asset allocation strategy, the key is to choose the right balance of high- and low-risk asset classes to invest in and allocate the right percentage of your funds to lessen the risk and increase the reward. For example, as a 30-year-old investor, the rule of thumb says to invest 70% in riskier investments and 30% in safer investments to ensure you’re maximizing risk vs. reward.

Well, you could allocate 70% of your investment to a mix of riskier investments, including stocks, REITs, international stocks, and emerging markets, spreading that 70% across all these types of asset classes. The other 30% should go to less risky investments, like bonds or mutual funds, to lessen the risk of losses.

As with diversification, the reason this is done is that certain asset classes will perform differently depending on how they respond to market forces, so investors spread their investments across asset allocations to help protect their money from downturns. 

Bonus: Ready to ditch debt, save money, and build real wealth? Download our FREE Ultimate Guide to Personal Finance.

Components of a well-diversified portfolio

In order to have a well-diversified portfolio, it’s important to have the right income-producing assets in the mix. The best portfolio diversification examples include:

Stocks

Stocks are an important component of a well-diversified portfolio. When you own stock, you own a part of the company. 

Stocks are considered riskier than other types of investments because they are volatile and can shrink very quickly. If the price of your stock drops, your investment could be worth less money than you paid if and when you decide to sell it. But, that risk can also pay off. Stocks also offer the opportunity for higher growth over the long term, which is why investors like them. 

While stocks are some of the riskiest investments, there are safer alternatives. For example, you can opt for mutual funds as part of your strategy. When you own shares in a mutual fund, you own shares in a company that buys shares in other companies, bonds, or other securities. The entire goal of a mutual fund is to lessen the risk of stock market investing, so these are typically safer than other investment types.

Bonds

Bonds are also used to create a well-diversified portfolio. When you buy a bond, you’re lending money in exchange for interest over a fixed amount of time. Bonds are typically considered safer and less volatile because they offer a fixed rate of return. And, they can act as a cushion against the ups and downs of the stock market. 

The downside is that the returns are lower, and are acquired over a longer-term. That said, there are options, like high-yield bonds and certain international bonds, that offer much higher yields, but they do come with more risk.

Cash

Cash is another component of a solid portfolio, and it includes liquid money and the money that you have in your checking and savings accounts, as well as certificates of deposit, or CDs, and savings and treasury bills. Cash is the least volatile asset class, but you pay for the safety of cash with lower returns.  

Additional components of diversification

There are other components of diversification, too. As with the other asset classes, these alternative assets are used by some investors to further protect their portfolios. These include:

Real estate or REITs

You can also use real estate funds, including real estate investment trusts (REITs), to diversify your portfolio and provide protection against the risks of other types of investments. Real estate funds work similarly to mutual funds, but rather than investing in a company that buys shares in bonds, stocks, and other common securities, you’re investing in a company that owns, operates, or finances income-generating real estate, like multi-unit apartments or rental properties.

Asset allocation funds

An asset allocation fund is a fund that is built to offer investors a diversified portfolio of investments that is spread across various asset classes. In other words, these funds are already diversified for investors, so they’re often the only fund necessary for investors to have a diversified portfolio. 

International stocks

Investors also have the option of investing in international stocks to diversify their portfolios. These stocks, issued by non-U.S. companies, can offer huge potential returns, but as with any other investment that offers the potential for a big payoff, they can also be extremely risky. 

Bonus: Want to know how to make as much money as you want and live life on your terms? Download our FREE Ultimate Guide to Making Money

Diversified portfolio example #1: The Swensen Model

Just for fun, we want to show you David Swensen’s diversified portfolio. David runs Yale’s fabled endowment, and for more than 20 years he generated an astonishing 16.3% annualized return — while most managers can’t even beat 8%. That means he’s DOUBLED Yale’s money every four-and-a-half years from 1985 to today, and his portfolio is above.

David is the Michael Jordan of asset allocation and spends all of his time tweaking 1% here and 1% there. You don’t need to do that. All you need to do is consider asset allocation and diversification in your own portfolio, and you’ll be way ahead of anyone trying to “pick stocks.”

His excellent suggestion for how you can allocate your money:

ASSET CLASS	% BREAKDOWN
Domestic equities	30%
Real estate funds	20%
Government bonds	15%
Developed-world international equities	15%
Treasury inflation-protected securities	15%
Emerging-market equities	5%
TOTAL	100%

What do you notice about this asset allocation?

No single choice represents an overwhelming part of the portfolio.

As illustrated by the tech bubble burst in 2001 and also the housing bubble burst of 2008, any sector can drop at any time. When it does, you don’t want it to drag your entire portfolio down with it. As we know, lower risk generally equals lower reward.

BUT the coolest thing about asset allocation is that you can actually reduce risk while maintaining a solid return. This is why Swensen’s model is a great diversified portfolio example to base your portfolio on.

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Diversified portfolio example #2: Ramit Sethi’s diversified portfolio example

This is our founder, personal finance expert Ramit Sethi’s investment portfolio.

The asset classes are broken down like this:

ASSET CLASS	% BREAKDOWN
Cash	2%
Stocks	83%
Bonds	15%
TOTAL	100%

Here are three pieces of context so you understand the WHY behind the numbers:

Lifecycle funds: The foundation for my portfolio

For most people, Ramit recommend the majority of investments go in lifecycle funds (aka target-date funds). 

Remember: Asset allocation is everything. That’s why Ramit picks mostly target-date funds that automatically do the rebalancing for him. It’s a no-brainer for someone who:

1. Loves automation.
2. Doesn’t want to worry about rebalancing a portfolio all the time.

They work by diversifying your investments for you based on your age. And, as you get older, target-date funds automatically adjust your asset allocation for you.

Let’s look at an example:

If you plan to retire in about 30 years, a good target date fund for you might be the Vanguard Target Retirement 2050 Fund (VFIFX). The 2050 represents the year in which you’ll likely retire.

Since 2050 is still a ways away, this fund will contain more risky investments such as stocks. However, as it gets closer and closer to 2050, the fund will automatically adjust to contain safer investments such as bonds, because you’re getting closer to retirement age.

These funds aren’t for everyone though. You might have a different level of risk or different goals. (At a certain point, you may want to choose individual index funds inside and outside of retirement accounts for tax advantages.)

However, they are designed for people who don’t want to mess around with rebalancing their portfolio at all. For you, the ease of use that comes with lifecycle funds might outweigh the loss of returns.

Conclusion

As an investor, it’s never wise to put all of your eggs in one basket. The key is to find the right strategy, whether that’s focusing on one asset category and going all-in on a wide range of investments within that category or spreading out your investments across all asset classes.

Either type of investment strategy can help reduce the risk while increasing the possibilities of rewards, which is what investing is all about. Make sure you do your research and have the right approach for your needs, and you should be able to reap the benefits that a well-diversified portfolio offers. 

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What is a diversified portfolio? (with examples) is a post from: I Will Teach You To Be Rich.

Via Finance http://www.rssmix.com/

Using a Roth Conversion Ladder to Retire Early

Many of us have dreamed of the potential of early retirement or FIRE, but it can be overwhelming to figure out how you might sustain yourself as you move into this new phase of your life.

Luckily, there are many options. Aside from saving the amount you need to retire, you can also leverage several tax loopholes in order to acquire funds in your tax-advantaged investment accounts.

One loophole: Build a Roth conversion ladder.

A Roth conversion ladder works by converting money from a 401k to a Traditional IRA to a Roth IRA, and withdrawing the principal amount after five years without any penalties.

This means you’ll be able to withdraw money from your 401k and Roth IRA earlier — allowing you to use your money faster and retire sooner (if that’s your thing).

There is a bit more to it than that though. To fully understand how it works, we need to take a look at the issues with a Roth IRA on its own.

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Roth IRAs and early retirement

When considering early retirement, traditional IRAs and 401ks can seem to put you in an impossible situation. Don’t get us wrong. We love both of these forms of retirement savings, and they absolutely have their place on the journey of smart investing for retirement.

Both of these accounts enable you to save for retirement in a highly productive way. A traditional IRA leverages your after-tax income to compound interest on your investments over time. You also don’t have to pay any taxes on it until after you withdraw it.

The drawback? You can only withdraw your money once you reach retirement age. That means when you turn 59 1/2, you can finally get access to all that money, likely years after you would like if you are planning to retire early.

Traditional IRA

• Uses after-tax income
• Pay no taxes when you withdraw at age 59 ½
• 10% penalty if you withdraw early

401k

• Uses pre-tax income
• Employer match
• No taxes on it until you withdraw at age 59 ½
• 10% penalty if you withdraw early

A 401k offers you similar gains and drawbacks to an IRA, giving you the chance to contribute pre-tax income this time which an employer can match. You still pay no taxes until you withdraw it at retirement age, but you also incur a penalty of 10% if you withdraw it before that age.

This information can make some people feel like they are stuck between a rock and a hard place. But, luckily for you, this is where the Roth conversion ladder comes into play whether you have an IRA or a 401k.

Bonus: Unsure what the difference between a 401k and a Roth IRA is? Check out my Ultimate Guide to Personal Finance where I explain everything you need to know about retirement accounts.

What is a Roth Conversion Ladder?

Simply put, a Roth conversion ladder is the loophole you have to withdraw a large pool of money from your retirement funds, both tax and penalty-free. Without this technique, anyone in the FIRE community will end up getting an early withdrawal penalty of up to 10%, taking quite a chunk out of those hard-earned savings.

Most of those seeking early retirement do so because they have amassed a large amount of net worth. Their retirement investment accounts, such as a 401k or traditional IRA, will reflect this worth. For most of them, they plan to live on these investments for the rest of their life. The Roth conversion ladder allows them to access the accounts early in order to do that.

The Roth conversion ladder essentially involves moving your money from your restrictive retirement accounts to more of an open system. Keep reading to figure out exactly how we recommend doing this.

Who should use a Roth Conversion Ladder?

A Roth conversion ladder is specifically useful for people who want to retire early. For example, if you plan to retire after you are 59 1/2, you will only lose out by transferring your money into a Roth IRA since it is no longer tax-protected. The positive aspect of the Roth conversion ladder is that it allows you to withdraw money to live in during early retirement. 

You should NOT use this method to supplement your income to achieve a lifestyle you can’t otherwise afford. Instead, the money should realistically stay in your retirement accounts to accrue as much tax-free interest for as many years as possible, or you will find retirement quite a challenge.

How to set up your Roth Conversion Ladder

Utilizing a loophole to the penalty system in place around retirement funds might sound complicated. However, building an effective Roth conversion ladder is simply a matter of moving your money around and patience until it becomes usable. Start your Roth conversion ladder in just four steps.

1. Start by rolling over your 401k into a Traditional IRA. You should do this once you quit your job. From the time you quit any job, you are free to move your 401k money from that job into an IRA. Also, be aware you aren’t obliged to keep it with the same company that was holding your original 401k. Make the choice that is best for you after considering the options.
2. The next step is to transfer some funds from the traditional IRA account into a Roth IRA. Transfer the annual amount you want to access in five years. Do you already have some income from Roth investments you made while working? Then, we suggest only transferring the amount to bring this up to the amount of your annual expenses instead of transferring the entire sum of annual expenses. You will lose less money on taxes doing this in the end.
3. Next comes patience. Wait five years. The “Five Year Rule” applies to any investments in an account like a Roth IRA. It means that the investor can only take out the invested money after a five-year waiting period.
4. Finally, withdraw the money you converted like an old friend you haven’t seen for five years.

The “ladder” part of the strategy comes into it when you use the technique on a recurring annual basis. As you move toward retirement, you continue to use the ladder to supplement your annual funds until you have reached five years before 59 1/2 when the funds become available.

Why not just contribute annually to a Roth IRA?

You take money out of a tax-protected account when you transfer money from a traditional IRA into a Roth IRA. That means you need to be ready to pay taxes on any money you transfer from a 401k or IRA into a Roth IRA. This is because contributions to a Roth IRA don’t lower your adjusted gross income, whereas you can get tax breaks when you make contributions to your 401k or traditional IRA. Instead, the money you transfer becomes taxable income for the year.

Another reason you should avoid contributing to a Roth IRA annually is if you are getting anywhere close to emptying your retirement accounts before retirement age. You need to have enough saved to keep up your preferred lifestyle for as long as you plan to be in retirement.

Additionally, you can only take money out of a Roth IRA five years after initially transferring the money into the account. You need to find some money to live on until then. You might already have this covered from 

There are plenty of ways to do that, though. Here are a few we at IWT love:

• Create a side hustle
• Negotiate your rent 
• Sell stuff online

Don’t forget about standard retirement accounts for early retirement

Since your Roth conversion ladder only provides you money until you reach 59 ½ years old, you need to have a retirement savings plan for the years beyond that. The first step to finding out exactly how much you need for retirement, which you can do following the steps in the next section. However, when it comes to investing the money you save annually, you need to know what kinds of standard retirement accounts you should keep to make the most out of your money for early retirement?

You will likely be saving a significant portion of your income each year for retirement, particularly if your goal is to do this early. However, it would be best to maximize your retirement accounts to make the journey faster. Although it will look different for anyone on the road to financial independence, the common accounts you can build while you are still working include:

• Traditional IRA
• 403b
• 401k

Each of these works slightly differently and has various potentials of effectiveness for your retirement funds. So what do we mean by maxing these accounts out each month or year? 

All three of these accounts are tax-protected. The government caps the amount of investment in these so that those in a higher wage bracket don’t benefit more from tax breaks than most lower earners. 

Reaching these caps is your goal.

From the time you build your net worth to your retirement goal, you are then ready to retire early and reap the rewards of these accounts using the Roth ladder strategy.

Commonly asked questions about a Roth conversion ladder

How much money should I convert each year?

The amount you should convert each year you employ the Roth ladder strategy depends on how much you have saved and how much you intend to spend each year. As long as you have enough saved for retirement, you should be able to send over the intended amount you will spend annually. So the real question is, how much should you save for retirement?

You’ll need to look at three numbers to figure this out:

1. Your income, meaning the amount you make a year after tax.
2. The amount you spend each year, or your expenses. These include absolutely everything you spend money on during the year, including utilities, groceries, rent, clothes, vacations, insurance, gas, etc. 
3. Your intended retirement date. Once you start considering “early” retirement, you get into a pretty subjective area. You need to set out a timeline for your early retirement plans to be truly prepared to be financially independent for the rest of your life.

You might figure all these numbers out and then, six years later, experience a significant life change. Remember to be flexible with all of these, whether they go up or down. You never know what life has in store for you.

Once you have calculated these numbers, you can come up with an annual savings rate for the precise amount you should be saving each month for your retirement.

You can use this convenient calculator to figure it out. It utilizes the 4% Rule of a safe withdrawal rate. Do you not want the calculator to do the work for you? You can figure out your own 4% Rule number by:

1. Figuring out your yearly expenses.
2. Multiply this by the number of years you anticipate being retired. For typical retirees, this will be estimated at 25. For early retirees, add the assumed amount of years.

The estimates below are all based on the expenses being multiplied by the typical 25 years assumed for a retiree.

ANNUAL EXPENSES	HOW MUCH YOU NEED TO SAVE
$20,000	$500,000
$30,000	$750,000
$40,000	$1,000,000
$50,000	$1,250,000
$60,000	$1,500,000
$70,000	$1,750,000
$80,000	$2,000,000

Although the numbers might seem quite large, we are talking about what you need to save across a diversified portfolio of accounts over quite a few years. As long as you are willing to put the effort in and realize that the more you save, the earlier you can reach your retirement goals, you won’t have an issue hitting your goal numbers.

How much should I expect to pay in taxes on a Roth IRA conversion?

The exact number depends on the exact amount you transfer each year, tax percentages the year you transfer and inflation rates as time moves forward. However, the amount isn’t quite as important as the method you will use to pay that amount. Once you have figured out exactly how much you should expect to pay each time you move money from your 401k or IRA to a Roth, you need to be prepared to pay it.

However, you shouldn’t have to worry too much about this since you will likely be living off the Roth contributions you made while working with a supplement of the money from your retirement funds. Moreover, since Roth contributions are already taxed, your tax bracket will only account for the yearly transfers and thus should be very low.

Is there a limit I can convert into a Roth IRA?

There is no limit to how much you can convert from your various retirement accounts into a Roth IRA. However, keep two things in mind. 

First, once that money leaves the tax-protected accounts, you will have to be ready to deal with the annual taxes. 

The second thing to remember is that a Roth ladder strategy only works as it should if you don’t run out of money. Therefore, it is essential to evaluate the long term to ensure you will still have the funds to continue supporting your lifestyle even after turning 59 1/2. 

Saving for retirement is a habit you can build. Learn how to build good habits and break bad ones with our FREE Ultimate Guide to Habits.

What is the best time to start a Roth conversion ladder?

When implementing a Roth conversion ladder, you should start your first Roth conversion the year you plan on retiring. After that, you should continue to make conversions for the annual amount you require to live each year, with conversion continuing up to 5 years before you turn 59 1/2. That way, the only financial “gap” you will have from your Roth conversion will be in the first five years of retirement. Once you reach 59 1/2, you can freely withdraw money from any of your retirement accounts.

You can also do a Roth conversion after you have reached 59 1/2 years old. However, this kind of conversion always comes with a tax bill. While this is acceptable when the alternative is taking a 10% penalty fee that would come from withdrawing from your retirement accounts early, it isn’t necessary after you have reached retirement age.

Additionally, when you move the funds out of your 401k or a traditional IRA, it means you will miss out on any tax-free growth you could have had.

Playing your cards right during your working years can seem worthless if you have to take penalty fee after penalty fee to access your money. However, using a Roth conversion ladder gives you a way to join the FIRE community, enjoying early retirement without a 10% fee for it. If you are wondering how you might jump on this bandwagon of financial independence, check out our Ultimate Guide to Making Money so that you can start your own path to join the FIRE community.

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Using a Roth Conversion Ladder to Retire Early is a post from: I Will Teach You To Be Rich.

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Informational interview questions to ask that create a lasting impression

What if you lost your job today and needed a new job in a week? Could you do it?

What if you just wanted some advice for a tough career decision? Is there someone you could ask?

Or what if you wanted to make a big career change, like switching industries? Is there anyone you could call for help?

The secret to solving all of these challenges is the same: informational interviews.

Informational interviews: What they are and how they work

You’ve likely heard employment buzzwords like networking or mentoring being thrown around, but have you ever heard of the term informational interview? Informational interviews can be the difference between a thriving career and a career stalemate, but not everyone is familiar with how these types of interviews work. 

At a high-level, here’s how an informational interview works:

1. You find someone doing the job you’re interested in
2. Invite them out to coffee or ask them to chat over the phone
3. Ask key questions about the job and gather insider information
4. Then, use what you learned to make an informed decision about your career

Simple, right? It is — as long as you understand the rules: 

• It’s not about a job. You’re not actively trying to land a new position with an informational interview.
• You’re there to learn. The purpose of this type of interview is to learn about what the other person does, how they do it, and what they like or dislike about their job. 
• You listen and they talk. The other person does the talking, but you steer the conversation with insightful questions that matter to both of you. 

That said, informational interviews can most certainly lead to more job opportunities in the future, but only if you conduct them in the right way by asking the right questions to the right people. 

Let us show you how to master this powerful job search tool.

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How to ask for an informational interview (and who to ask!)

One of the biggest hurdles to getting an informational interview is knowing how to ask for one and who to ask. An informational interview is only useful if you target someone whose role you could see yourself in, whose field you may be interested in, or whose team you may want to be hired onto in the future. 

Otherwise, it’s just going to end up being coffee and a Q&A with no real purpose. While that’s nice, it’s not exactly the goal of the exercise.

Before you send out any invites, though, be sure you know who exactly you need to interview. Here are a few tips to help narrow it down:

• Know the right type of person to ask. This could be people who are already in your network of contacts in a particular field, company, or job that interests you. Or, it could be someone you cold call (or cold email, rather) with the request. 
• Don’t have someone in mind? Look through your networking contacts on sites like LinkedIn or any other social media outlet. These sites can be gold mines when it comes to building work contacts. You may even have a connection with someone in your ideal role or field already.
• Can’t find the right person in your connections? Don’t let that stop you. A connection in a similar field may be able to help identify the right person to contact for a coffee chat email. It doesn’t hurt to reach out.
• Or, just search and identify a few people you may want to ask for an exploratory interview. You can use a social networking platform or a simple Google search to do this. You’d be surprised how many people are willing to take a quick call or coffee break to chat about their jobs with you.

Once you’ve identified the person or persons you want to ask, all you have to do is reach out to the person you want to meet with by sending a friendly but concise email asking for a meeting. 

You’re free to word these requests as you see fit, but the wording of the email could be as simple as: 

“Hi, Brad! My name is Ann, and Kelly Smith suggested I speak with you because I am interested in learning more about your field or role. If you’re open to it, I would love to get some advice from you on this role or field. Would you have time in the next two weeks to meet for coffee so that I can learn more about your company and the role or field?”

If you aren’t sure what to say, there are even word-for-word email scripts that can help. The hard work is basically done for you.

You may strike out a few times, and that’s OK. Just keep reaching out to the right people, and eventually, you’ll find success. 

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How to ask the right informational interview questions

Once you’ve landed a “yes” for an informational interview, you need to take time to prepare for the interview, which starts with compiling a list of the right questions to ask. This step is crucial if you want to learn more about a role or company.

It’s important to start the process of an informational interview with just one goal in mind: learning more about what the other person does and how they feel about it. These tips can help you ask the right types of questions:

• Leave out any questions that you could learn the answers to by a quick Google search. The internet is a well of information on things like company benefits, salary information, career trajectories, and other hard and fast facts, so leave those out of the equation. 
• Ask the types of questions that require a personal answer. Inquire the person about the career path was that they took to get to their current position, or ask about what special certifications or education they pursued that may have set them apart. 
• Make sure your questions are open-ended. Try not to ask yes or no questions, even on follow-ups. Doing so will quickly put a damper on the conversation. 
• Tailor your questions to focus on their experiences in the industry or role. The goal is to get them to tell you about themselves and their path to the role that you’re eying. 

These types of open-ended, well-phrased questions make the person you’re interviewing feel comfortable with you. They’re also a sign that you have respect for the other person’s experience and expertise, which is important if you want to also build a networking relationship. 

Here are a few examples you can use to help you craft your own questions:

Example 1:

• Good question: “I noticed on your LinkedIn that your job in this industry focuses around <insert a special niche or project>. That seems like a unique opportunity to be given in this field. How did you find an opening to pursue <the special project or niche>? It sounds like something I’d also like to pursue in the future.”
• Not-so-good question: “You work in a <insert special niche or field at company> that I’d like to be in. Can you help me get a job at your company?”

Example 2:

• Good question: “What steps did you take to work up to your current earning potential? Do you have any tips for those of us who are just starting out in the field?”
• Not-so-good question: “How much money do you make?”

Example 3:

• Good question: “What are some of the more difficult challenges or hurdles you face in this role?”
• Not-so-good question: “What do you hate about this job?”

Notice the subtle differences? The good questions are open-ended and inquisitive. The not-so-good questions are pointed, closed questions that are going to make the person you’re interviewing very uncomfortable — and put your interview at risk of going downhill. 

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The big mistakes to avoid during informational interviews 

Knowing who to ask for help — and what to ask — are just two small pieces of the informational interview puzzle. There is an art to pulling off a successful informational interview, and it involves a lot more don’ts than do’s.

If you want to successfully navigate the art of informational interviews, you should make every effort to avoid the big (and surprisingly common) mistakes. These include:

1. Arriving late — or way too early

If you’re pursuing work- or career-related tips from your interviewee, chances are that they’re a busy professional with lots on their plate. What that means is that you should make every effort to avoid taking the other person’s time for granted.

Don’t be late for your meeting — that’s an obvious one — but avoid being early, too, especially if you’re meeting at their place of employment. Don’t arrive more than five minutes early or you could put them in a precarious position (or embarrass yourself by barging in on a meeting you weren’t invited to).

2. Asking for a job

While you may want a job from this person. In fact, what they do may even be your dream job, but you need to avoid asking for a job opportunity at all costs. If you crafted your initial email the right way, you’ve already made it clear that you aren’t asking for anything other than the person’s time and insight. So, don’t flip the script on them when you meet in person.

If you conduct yourself professionally and make a good impression, a job offer may organically grow from your interactions. But you are not there for a job interview, so don’t expect a job to grow out of your interactions. If it does? Great. If it doesn’t, you’ve still gained a lot of value from their time and insight.

3. Dominating the conversation

If you’re nervous, or if there are awkward pauses, you may feel tempted to try and fill the silence with nonstop chatter. Or, you may feel the need to offer commentary after every question is answered. Don’t do that. Ask and actively listen instead.

Remember that the goal of this informational interview is to learn what you can from another professional who works in a job or at a company you’d like to pursue. You should be spending about 90% of your time during this interview on the listening end — not the talking end. If you’re finding yourself talking more than listening, you’re headed down the wrong path. 

4. Asking for introductions

You may have targeted your interviewee because they have great connections in the industry you want to be in. They may know the CEO of a certain company or have a friend or acquaintance who works in recruiting for a major firm. That’s all fine and good, but don’t allude to the fact that you’re looking for introductions to these key people.

Keep the talk about the interviewee — not about who they know. And whatever you do, avoid asking for introductions to anyone on their connections list, in their current company, at their former company, or in their inner circle. You asked to meet with them to discuss their experience and role — not to meet another party who may benefit you more. 

5. Skipping the thank you

One of the biggest mistakes people make is skipping the formal thank you after the informational interview. Remember that the person who met with you took time out of their busy schedule to try and help you. A sacrifice like that requires proper thanks.

Send a card, an email, or some other form of written communication to thank them for the time they spent on you. Show them that you’re grateful for their help and advice, and do so quickly after you meet. This showcases your professionalism, and leaves them with the best impression of you possible — which can come in handy should future opportunities arise that you may be a fit for.

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One final informational interview tip

While it’s important to have the right questions in mind and avoid the big mistakes when conducting an informational interview, you should also try not to overthink it. The goal of this process is for you to learn and grow while networking — not conduct every word, mannerism, and interaction by the book. That’s way too much pressure for one person to handle.

But if you relax, engage, and most importantly, listen, you’re much more likely to come out of the process with the information that you need and a new networking contact on your side. If you’re too busy focusing on what to ask next or how to phrase the questions the right way, though, you’ll run the risk of missing vital information or advice — and that’s the opposite of what you want to achieve.

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Informational interview questions to ask that create a lasting impression is a post from: I Will Teach You To Be Rich.

Via Finance http://www.rssmix.com/