What is the best order to invest money? Roth vs. 401K vs. Life Insurance?

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I am a 34 year old, married, father of 4, resident physician who just got a $ 60K pay raise. I was making $ 42K during my first year of residency training, but now with moonlighting, I am making $ 100K. What is the best order to invest? Of course I started with the 401K because my employer matches 4% if I invest 5%. But what next? Life Insurance, Roth, Traditional IRA, etc. or should I pay down my mortgage($ 200K at 8%APR) or student loans($ 150K at 3%APR)? My wife has a small traditional IRA, but we have no other investments. Thanks for any advice.

  1. Reply
    February 3, 2011 at 10:37 pm

    First, you have the ability to put up to $ 15K in your 401K each year. (Unless you are restricted by the “top-heavy” rules.) You can just specify that you want 15K taken out without needing to give a percentage.

    Given that you are under $ 150K per year, you should next put money into a Roth IRA. (Traditional IRA will not be deductible for you.) Even if your wife has no income, you can also put money into her Roth IRA. If you are going to look at annuities, please go with a Vanguard that won’t rip you off with the fees. Insurance/annuities are treacherous because you get locked into ridiculous fees.

    Finally, your mortgage interest rate seems high. In a couple of months, when the credit markets clear up, you should look to re-finance. If, for some reason, you cannot refinance, I’d suggest that you pay it down before investing in any annuities.

    Your student loan has a low rate that I think is tax-deductible. I would pay it down with your regular monthly payments. This whole discussion presupposes that you have built an emergency fund, have adequate life (term-only) and disability insurance, and have no special circumstances.

  2. Reply
    Sad Soul
    February 3, 2011 at 11:12 pm

    Best order to invest money?

    1) Max out your Roth IRA contributions. I would divide the maximum limit over a 12 month period. For example, invest $ 333.33/month vs putting $ 4000 once a year.

    2) Max out your 401(k) contribution.

    3) If your wife isn’t working, you can max out her IRA contribution on her behalf.

    4) Setup an emergency fund (use money market fund as an emergency fund). There should be enough in there to last you 3-6 months in case there is an emergency (such as losing your job).

    5) If you still have money left over, check out Metlife’s PrimeElite IV variable annuity.

    As you can see here, I did not list life insurance. Life insurance is never an investment. It is insurance that pays a death claim in the event that you die. I would stay away from any life insurance policies that builds cash value. Cash value is the biggest scheme and if you are uneducated about it, you would fall into the deception that the cash value belongs to you.

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