OK, so as some of you know, I'm old. I'm not, really, but guys that
are like, 19, and spend most of their time at school and hanging out
on the internet don't get much exposure to people over 25, so you tend
to think that you all live in some version of a Logan's Run universe
where people over 30 are killed off. That in itself is a cultural
reference that y'all are probably too young to get, so here's the link.
By the way, if you check that out and are really confused as to why
that movie has some kind of cult status, trust me, it's not a
generation gap thing. Pretty bad movie. I got no clue. Maybe
in 30 years no one will have any clue why we liked Superbad either.

Anyway, there's a bunch of **** I wish I had done when I was younger
but didn't because no one told me to.

Oh, WAIT, snap, a bunch of people told me to do this **** ALL THE
****ING TIME. The real reason I didn't do it is because I was, like,
18, and I was pretty sure that everyone over 30 had been killed off,
so whatever old dude was telling me these things was obviously some
criminal on the run from the law that I dare not pay attention to.

I made a Pooh-Bah post once but don't remember ever making a Carpal
Tunnel one. And in the cheese thread a while ago, someone said that I was
like the crazy uncle that knew a bunch of random ****, so, in the hope that
some of you are more willing to trust me than your aunts and uncles and
parents and stuff (I am, after all, way cooler), I've got a list of some ****
that all of you really need to start doing now. I'll even try to prove it in
some EV terms.

I was going to do this in one post and then the first thing on the
list turned into a humongous cluster**** of a TLDR. So, this will
become a series. Part One: Stop Giving Away Free Money.

1) Max out an IRA now.

This is just ****ing huge. You are literally passing up an EASY
opportunity to get rich if you aren't doing this. Many of you have no
income other than poker and so no one has ever put a 401-k form in
front of you and the idea of saving for retirement is very far
away. So forget retirement. Here's something easier to understand.
IRA's are FREE ****ING MONEY. And lots of it.

You can put $5000 or so a year in a ROTH IRA, or $14k or so in a
traditional one. Here's why it's free money:

In a Roth, every penny you earn on interest or capital gains is tax
free, AND you don't pay taxes when you withdraw it at retirement. If
you assume a 10% yearly ROI (that may seem very high to you, but is
the average stock market return LONG TERM, so you could get this just
by investing in the an S&P 500 index fund), $5000 at age 18 amounts to
$243925.91 in free money at age 59. If we adjust for 3% inflation,
that means that putting $5k into a Roth at age 18 gets you a
$71,309.23 TAX-FREE return. There may be some geniouses that will
beat the stock market for more than this, but no way they can beat
this once you account for taxes.

Now, here's the real kicker. Did you ever hear anyone say that it's
important to start saving money early? They were really right. Like,
holy **** they were right. Here's why.

At age 19, the 5k investment returns a net profit of $66453 at age 59.
At 20, it's only $61906. At 21, $57649. 22? $53662. (All the
numbers are expressed in terms of today's dollars). To take the
example one step further, we'll take Bilbo, who puts in $5k a year
from ages 18-30 and then gets bored of it and stops investing,
vs. Frodo, who is too young and stupid to invest until he's 30, and
then realises his foolish ways and puts in $5k for the rest of his
life. At Age 59, here's what they both have:

Nominal Dollars:
Bilbo: $1,945,030.51 (inflation-adjusted 2008 dollars: $671k or so)
Frodo: $ 743,154.65 (inflation-adjusted 2008 dollars: $256k or so)

Yes, that lazy, smart ass Bilbo has 2 ****ing million from 12 years of
investing and that dumbass, hardworking Frodo has $750k from 28
years!!!! Further, Bilbo only had to spend $60k to get his $2 million
and Frodo had to spend $140k to get his $750k!! WAT?!? Seriously,
this should be one of the biggest aha-moments you can have. Compound
****ing interest, baby. Did I mention that ROTH withdrawals are TAX
FREE? So Bilbo paid $60k after-tax dollars, and
got $1.88 MILLION in tax-free earnings.

(as an aside, I hope this is also putting a light on for all you
bankroll nits (or nitwits) who have > 30 buyins online instead of in
some savings/money-market account earning 3%+).

You may not think so now, but I guarantee you that many, many, many of
you will get bored from poker, or move on to other jobs because the
games dry up, etc. You might get married and have unexpected
triplets. For a ton of you earning decently at poker, your income now
may be way higher than it is when you are 30, and you might have other
reasons to not be able to save for retirement later. Maybe you will
take 7 years off of poker and jobs to go to Med School, or to travel
the world, or whatever. So be the lucky ******* with $2 million and not
the diligent idiot with $750k.

Traditional IRAs are trickier. It's hard to guess how much free money
you get in these, because your contributions are tax-free (meaning if
you put $1 in an IRA, you get a $1 tax deduction, up to the limit),
BUT, you pay taxes when you withdraw at retirements. So the benefit
of a traditional IRA is that you essentially get to earn interest on
the $5k or so that you would have otherwise paid in taxes for X years,
before you "give it back" when you retire. But, of course, the
compound interest factor is just as relevant -- your winnings just
won't be tax free.

Suffice it to say that a Roth is probably a better investment UNLESS:

a) Your employer has a contribution match. Let's say your employer
matches your contributions dollar-for-dollar up to 2% of your salary
(some will go higher). If you earn $100k, and put $15k into an IRA,
your employer gives you $2k, for a 13% annual ROI before
considering stock market gains. If you earn $200k, your employer
matches $4k, for a 26% ROI ($4k / $15k ~ 26% or so), again before
interest. WOW. There simply is no hedge-fund genius in the world who
can beat an average Joe who gets a 13% head start (let alone more) for
40 years. This is pretty huge free money. And clearly, not a factor
for poker pros.

b) your tax rate is effectively zero when you retire. In this
scenario, of course, doing a Roth over a traditional IRA would be
something for people that hate money. This is fairly unlikely to happen,
obviously.

c) your tax rate will be much lower when you retire than it is now.
So, suffice it to say that, political discussions aside, it's
virtually impossible that the US will keep going at its current (very
low) taxation rate forever. Taxes are much more likely to be higher
in 40 years. And in any case, if you invest early and often (and not
in a spectacularly risky manner), you will likely be wealthy at
retirement, which in turn means higher, not lower taxes.

d) you think that Mike Huckabee will become President some day. If
the US ever abandons an income tax in favor of a VAT (i.e. national
sales tax), then, of course, this is pretty close to scenario b) -- if
there will be no income tax later, then paying income taxes now to
save on income taxes later is burning money when you could skip paying
income taxes now. Interesting food for thought if any of you are ever
going to get involved in politics -- think about who gains and who
loses in these kinds of policy discussions; I have lots of opinions on
this (and it isn't very black-and-white IMHO) but it's not interesting
enough for this post.

So, this is Bilbo's lesson number one. Any winning player at NL100+
has probably got $5k sitting round on its lazy ass somewhere doing
nothing. And if you are a pro at NL200+, that's like, half a month's
wages. Put that **** in a Roth right now, because it's a trivially
easy way to get rich. It's trivially easy to do, too -- just about
any online broker will set one up for you.

By the way, I politely ask all the other old guys in SSNL to come in
hear and tell me what terrible ****ing advice this is so that all the
young kids realize that this is actually a pretty smart idea if
all the old guys hate it.

Thanks bilbo for writing this. I read most of it and am happy to say I contributed to a Roth IRA last year right before tax season. This definitely reinforces my decision to do so.

**** yeah old dudes!!

thanks for this
bookmarking for reading later cuz i'm 19 when i comes to investing
lol, i'm 35 and am opening an ira next month. I had a roth ira when i was like 24 but cashed it out cuz i was a degen
oh, and this is EXACTLY what i needed to know cuz i'm currently debating between trad or roth.

anyone seen my diapers?

Really solid post. Guys, I used to be a mortgage broker and the majority of my calls were to old broke people who's mortgage payment was 1500 before taxes and insurance, and they only made $2k a month. In about 6 months as an lo, I talked to at least 1000 people in that situation. People just simply don't save money and pensions (LOL @ poker player pensions) and ss just dont get it done.

nh geezer

Nice post, Bilbo.

Yes indeed, not investing in a retirement account when you are young is just mind-numbingly dumb. Not just because it enables you to be rich when you're old, but it helps keep you from being broke when you're old.

If you think 60 years old is such a long time from now that it might as well be someone else's life, watch this Frontline program and have the **** scared out of you:

http://www.pbs.org/wgbh/pages/frontline/livingold/

Thanks very much! Really enjoyed it, this is something I will definetly consider doing

what if u die before 59?

Awesome post bilbo. I have a question about the diff between a traditional IRA and a Roth that I've never really understood - where does the difference actually apply? Like, if you start with X dollars now, chop off 30% for taxes, then let it grow for awhile and withdraw it tax-free, why aren't you left with the same amount of $$ as if you start with X dollars, let X grow in its entirety for awhile, and then chop off 30% when you withdraw? Like, if you're earning 5% per year or w/e, then $10,000 * 0.70 (taxes) * 1.05 * 1.05 * 1.05 etc is still the same as $10,000 * 1.05 * 1.05 * 1.05 * 0.70. So yeah, that's never made sense to me.

Also, my employer recently started offering a Roth IRA in addition to the current 401(k) and my dad mentioned I should look into converting my 401(k) monies into a Roth, particularly now because the stock market's been trash lately so I have less money to convert (and thus less money to pay taxes on) than if I did it after a market upswing. Should I do it?

Then your heirs get the money just like they would your bank accounts, property and comic book collection.

I am also an 'old' guy. Familly, kids, job. 200NL is pure gravy for me, save most winnings, spend some on travel and 'toys'. Canada though...poker is legal and no tax on winnings.

Move to Canada?!?!

Awesome post, I've been doing some research into this stuff recently. One good book I've found that gives some good advice in layman's terms is "The Bogleheads' Guide to Investing". Covers a wide range of stuff and pretty easy to understand.

Anyways, I have a few questions for you.

1)Do you have to choose one or the other? Can I max out a Roth and a traditional IRA each year? I assume there is some total limit, but can you invest more per year by investing in both? (I realize that by doing this I would be getting hit by the IRS coming and going, but if you can save more per year this way it might be worth it)

2)When employers match contributions to IRA's, does that contribution take a part of the total amount allowed to be invested per year? Like if you are allowed to invest 14K per year in a traditional IRA can you invest 14K and your employer match an additional 2K (or whatever 2% of your salary is), or does the total have to be 14K from all sources?

Thanks for doing this by the way, looking forward to the next installment

Thanks a lot for making this post, I'm definitely gonna look into it now

I'm 26. Is there any hope for me?

Srsly, nice post Bilbo. Although I'm european I understand and appreciate what you're trying to say.

I did put 50€ in a funds saving account in march which has now grown to 50.45€. Maybe I should start putting some more money in there.. I've been a student most of my short life and although I've had a few different jobs in between I really haven't gotten anything noteworthy saved for retirement. Need to grab myself by the neck and do something about it. Now.

One by one:

1) Since you don't withdraw everything at once, you have some ability to control your income (and thus your tax bracket) at retirement. This can mean not withdrawing as much in profitable years, withdrawing more in years where you incur an offsetting loss, etc.

2) The seed money is $X (where $X is the limit), not $X * (1 - Tax Rate). So your equation assumes (incorrectly) that in the seed money differs (and thus the amount of money in the account after X years differs).

3) As mentioned, it is very likely that your tax bracket will be higher when you retire.


Erm, beyond my expertise. I'd talk to a finance guy about this.

But my guess is that Roth > IRA when you are young, and IRA > Roth as you get older (because as you get older, your tax bracket increases, and thus the value of an immediate tax credit increases, and, the terminal value of your IRA account in comparison to your current contribution decreases, so the value of the deferred tax credit decreases).