Thursday, March 27, 2008

Early Retirement Planning: An Emergency?

I took the plunge last night. I tapped my entire emergency fund of $1,000 and deposited it into my Fidelity Roth IRA for 2007. I now have $1,500 in there and I'm shooting to squeeze in $500 more before April 15th to total $2000 for 2007 contributions. This would be huge for me. Already I'm happy with what I've managed to put in there, considering I started in January.

But the nagging question: Was it wise to empty my emergency fund to do this?

I think so, after much deliberation. There are a few reasons for this. For one, were a true emergency to arise, I could access those IRA funds (which are off-limits in practically all circumstances; I'm talking about major disaster like war, nuclear winter, etc.). I've also got some other money saved in my TD Ameritrade account, and my ING checking and savings accounts to cover any minor money problems. Weighing the importance of losing some short-term cushion over getting a nice chunk of money invested and starting to work for me for retirement, I think I made the right choice.

I'm relatively young - soon to be 28 - but I still feel like I've gotten started late in my retirement planning. I know that I'm in much better shape than many people, so that's reassuring, but I nevertheless feel like I need to play catch-up. After all, the best time to start planning for retirement is yesterday, but the second best time is now. Because I started building my financial house in January, I had a fairly short four-month window in which to try to maximize my contributions for the 2007 tax year. Because of the time limit, I feel that this was essentially a money emergency of sorts, and I am justified in using the EF for that purpose. If I can reach that 50% of the contribution limit of $4,000, then I will feel great about moving forward.

Now my priorities are as follows: I need to start rebuilding my emergency fund while contributing to my Europe travel fund and making sure that I keep making healthy monthly IRA contributions for 2008. I want to maximize my 2008 IRA contributions, and the total has increased to $5,000 for 2008. That works out to $416.67 per month if I start in April. Doable, but it will require serious discipline.

Time to reset that Emergency Fund NCN Network chart. I feel good about this decision, though. Very optimistic right now, which feels odd in this time of economic hardship.

1 comment:

Sistah Ant said...

You're right - the next best time is now. I started with a 401K last year when I was 27. Gotta start somewhere. I'm already into '08 contributions 'cause I filed '07 already and I want to ease the burden on '08 contributions for the rest of the year. I see what you're doing, though and it looks smart to me!