Planning for Retirement as a Young I-Banker

Hey everyone, I have a rather elementary question that I hope you'll excuse. Although I'll be working in finance (BB IBD FT in the fall), my knowledge of retirement planning is next to nonexistent. I've been trying to read up online, but am having trouble going through and actually understanding the numerous WSO threads + other online resources dedicated to this matter. I'm hoping you can help.

A couple questions:
1) It appears that many young investment bankers opt for the Roth IRA / Roth 401(k). Is this a correct perception? Do the majority of i-bankers select the Roth, or have I just been looking at biased threads?
2) If the above perception is true, and most i-bankers opt for the Roth, is it because though they're already earning six figures off the bat, they comfortably expect to earn even greater incomes by the time they retire? Isn't this kind of a ballsy move to assume that you'll make it big time as a partner, or as an owner of a hedge fund? What if you switch industries somewhere along the way, and are working at a small company with smaller income at your retirement age?

Thanks in advance. I understand that my questions are rather ELI5, but I look forward to your help.

Comments (15)

Mar 20, 2015

1) For now, I would start a Roth IRA if you don't already have one (and you have the funds). You can still contribute for the 2014 tax year to a Roth IRA and of course can contribute for the 2015 year now. Since your 2014 and 2015 tax rates are likely to be quite low, the Roth is definitely the way to go. For 2016, as a full-time analyst, the ability to get the immediate tax advantages of a regular IRA may be valuable. Depending on your employer, they may offer traditional 401(k) and Roth 401(k), or just the traditional 401(k). There is an income limit on Roth IRA; you cannot contribute directly to a Roth IRA if you MAGI is greater than $131K as of the 2015 tax year, and there is also a partial phase-out below that. You can, however, do the backdoor Roth by contributing to a traditional IRA and converting to a Roth immediately.

If you do have a choice between Roth and traditional, it's a complicated decision. Most likely, you will be making more in the future than you are now; but maybe not during your actual retirement. It's also not just about being in a higher tax bracket; there is the chance that overall tax rates could go up from current levels, so a Roth provides a hedge against this possibility. That said, depending on your "personal discount rate" you may also simply value the tax advantages now, when you aren't making much money, more than you do a bigger tax advantage at age 60.

2) I don't think it's that ballsy of a move to assume you will be making more than $125-150K down the road. You don't have to imagine yourself as a partner in banking/buyside to think you could be earning a bit more than that in relative terms at age 60. But it's up to you. If you see yourself as the guy who wants to build a decent sized nest egg, retire early, and live a frugal lifestyle in retirement (i.e., ERE or MMM communities), then it would be a bit silly to do the Roth because your future income is likely to be lower [your income upon tapping 401k / IRAs would be solely your investment income]. If you see yourself working until 60-70, however, it seems a safe assumption.

Mar 20, 2015

Contribute the full amount you can to the 401k to get the match and then open up an IRA or Roth IRA. The investment options in a 401k are really lousy, but nothing beats free money so use that up and then invest on your own. As for roth or regular you should probably opt for a mix of both along with investments not in a retierment account in case you need to access the money.

Mar 20, 2015

I agree with the post above. I would think the level of importance would be the following:

1) At a minimum, go up the max that your company will match for your 401(k). I dont mean to max out your 401(k), but if your company wil lmatch you $ for $ up to 6% or 8%, then at least put in that much. Free money is free $.

2) After that, personally, I would go and max out the Roth IRA. You're limited to contributions of $5,500 I believe. The reason for the Roth IRA, is as Extelleron mentioned, there is a income cap. Once you exceed that income limit, you are no longer eligible to contribute to the Roth. Thus, I would try and utilize the chance you have to it while you still can before you're no longer eligible. But again, it all depends on personal preference.

Putting those aside will not break your bank, and between that and the matched 401(K), you should be sitting around 16-19% if your income in savings. The general rule of thumb I was told (though I dont know how true it is), is if you save 15-20% of your salary annually, it can set you up to have a pretty similar standard of living after you retire. Obviously there are a lot of nuances to this that may effect the accuracy of that statement. But it is just a rule of thumb.

Best Response
Mar 20, 2015

Choice of spouse will impact your retirement much more than choice of 401(k), from both a fiscal and quality of life perspective.

I'm not saying your should ignore your 401(k). Just that you should plan your dating with more diligence and care than your 401(k).

    • 10
Mar 23, 2015

Overlooked and very important part of retirement planning. I owe you a SB

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Mar 25, 2015
SSits:

Choice of spouse will impact your retirement much more than choice of 401(k), from both a fiscal and quality of life perspective.
I'm not saying your should ignore your 401(k). Just that you should plan your dating with more diligence and care than your 401(k).

I keep getting SBs for this, but, as advice, it's pretty trite stuff. No more SBs, please.

Mar 20, 2015

Doesn't the Roth IRA have an income limit of just under $120,000 for single filers? That would disqualify most analysts from contributing to a Roth IRA, right? I am not a CPA, so feel free to correct me.

I contribute the maximum that I can to my 401(k). The employer match is free money, so definitely max that out if your employer offers it.

    • 1
Mar 20, 2015
Sil:

Doesn't the Roth IRA have an income limit of just under $120,000 for single filers? That would disqualify most analysts from contributing to a Roth IRA, right? I am not a CPA, so feel free to correct me.

I contribute the maximum that I can to my 401(k). The employer match is free money, so definitely max that out if your employer offers it.

The ability to contribute directly to a Roth IRA is eliminated for single filers at $131K (for 2015 tax year) and the amount you can contribute is phased out between $116-131K of income. However, an income greater than $131K does not prevent you from converting a traditional IRA to a Roth IRA. This is the "backdoor" Roth which is very popular. You contribute your $5500 to a traditional IRA and can immediately convert the traditional IRA to a Roth IRA. There are no tax issues with the conversion because you just never claim the initial IRA contribution as a tax deduction.

    • 2
Mar 21, 2015
Extelleron:
Sil:

Doesn't the Roth IRA have an income limit of just under $120,000 for single filers? That would disqualify most analysts from contributing to a Roth IRA, right? I am not a CPA, so feel free to correct me.

I contribute the maximum that I can to my 401(k). The employer match is free money, so definitely max that out if your employer offers it.

The ability to contribute directly to a Roth IRA is eliminated for single filers at $131K (for 2015 tax year) and the amount you can contribute is phased out between $116-131K of income. However, an income greater than $131K does not prevent you from converting a traditional IRA to a Roth IRA. This is the "backdoor" Roth which is very popular. You contribute your $5500 to a traditional IRA and can immediately convert the traditional IRA to a Roth IRA. There are no tax issues with the conversion because you just never claim the initial IRA contribution as a tax deduction.

Thank you! SBed.

Mar 23, 2015

Thank you. Q: I rolled over my 401k to an IRA, and because I went back school I decided to roll that account in its entirety over to Roth IRA. I think I'm on the hook for about 25% or so in taxes but think it's worth it for me long term. What do you think about this backdoor conversion?

Mar 23, 2015

From my own perspective, maxing the retirement deposits every year is a main goal. Down the road, you can get a wealth advisor to do this worrying for you.

Can you believe about 70% of Americans nearing retirement age have under $30,000? I can link you guys the article if you need.

Mar 23, 2015

I'd seek professional council. Now, my opinion is biased because I'm a retirement planner, just being full disclosure.

At some point when you run into serious money, you'll run into some serious problems, be it with taxes, insurance, all that stuff. Retirement planning is only a small part of a full financial plan, a planner can help you with all aspects. Just my $0.02

Mar 24, 2015

@"thebrofessor" its all yours man.

Also if your start fulltime you will probably make to much to contribute to a Roth. If you want to prepare for retirement dont blow your money, invest it, and be disciplined. I hate personal finance conversations because people act like there is some sort of secret on it.

http://www.wsj.com/articles/route-to-an-8-million-...

Mar 24, 2015
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