You Might Need to Check Your 401(k) if…

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Several weeks ago I was attending a comedy show and one of the comedians was Jeff Foxworthy. If you live in the southeast, you are probably familiar with Foxworthy and some of his acts and stories including his famous “You Might Be a Redneck if…” jokes. For those of you outside the southeastern United States, Foxworthy often defines a “redneck” as “someone with a glorious lack of sophistication.” Parts of his routine may be slightly exaggerated, but it’s quite funny because it is relatable to some of the good people of the south. For example, Foxworthy would tell you that you that you might be a redneck if you have ever cut grass and found a car, if you've ever bought a used baseball cap, and if you've ever deliberately hit a deer with a car, but I digress…

One part of my job as a financial planner and investment advisor is to help clients properly consider their employer’s retirement plans and properly coordinate their plan’s investment options with their risk tolerance, time horizon, and overall investment strategy. In my experience I have found that this is a financial area that many people do not consider as closely or as frequently as they should. A long airline flight out west to visit some clients gives a guy from the southeast some time to think, so I thought today I’d mix one of Jeff Foxworthy’s most famous skits with some retirement plan warning signs. I present to you “You Might Need to Check Your 401(k) if...”

• If you aren’t positive how to log into your employer’s retirement plan website, you might need to check your 401(k) Plan.
• If you don’t know the custodian or administrator’s name who is in charge of your employer’s retirement plan, you might need to check your 401(k) Plan.
• If you don’t know how much you’re contributing each pay period, you might need to check your 401(k) Plan.
• If you don’t know your company’s matching contribution, or if they even have one, you might need to check your 401(k) Plan.
• If you’re not sure how your contributions are invested, or if you ever chose for your contributions to be invested in the first place, you might need to check your 401(k) Plan.
• If you don’t really have a reason outside of “gut feel” or what your co-worker told you they did for why your contributions are invested the way they are, you might need to check your 401(k) Plan.
• If your contributions are invested heavily in your company’s stock, you might need to check your 401(k) Plan.
• If you aren’t certain you have confirmation of your plan’s primary and contingent beneficiaries, you might need to check your 401(k) Plan.
• If you aren’t sure you ever did anything with your employer retirement plans from previous jobs, you might need to check your old 401(k) Plans.

It doesn’t matter what your employer's retirement plan is called. It can be a 401(k) Plan, a 403(b) Plan, a Thrift Savings Plan, a Retirement Savings Plan, or anything else. What matters is that you can affirmatively answer that no, you don’t need to check your employer’s retirement plan after each of my above phrases. If you don’t need to check your retirement plan, that’s great, and I urge you to keep up the good work. If you found some of my phrases troubling, concerning, or even embarrassing, it really is no laughing matter, and I hope you’ll quickly rectify the situation.

As always, please let me know if I can help.

-Tom

Who Wants to Be a Millionaire?

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Do you remember the game show originally hosted by Regis Philbin called Who Wants to be a Millionaire? The show consisted of contestants being asked multiple-choice questions that got more and more challenging as potential prize money increased, but contestants were also given a series of “lifelines” to help aid them with difficult questions. Well today I thought we’d have a little fun. I have a unique trivia question for every single one of you and I would like to serve as one of your lifelines and offer six tips that can help you reach your financial accumulation goal, whatever it is.

1. Save first, spend second. Live a lifestyle that is below your means and make sure you are steadily saving your money in cash accounts, retirement accounts, and taxable accounts. As Dave Ramsey says, “If you live like no one else now, later you can live like no one else!”
2. Make sure you are saving money in your employer’s retirement plan (401(k), 403(b), 457, etc.). This is a great way to reduce your current taxes and really grow your retirement nest egg over time. Put in as much as you can, but make sure you are at least contributing what is necessary to receive the full value of your employer’s matching contributions if they offer them. For employees under age 50, $18,000 is usually the most you can contribute each year. For employees over age 50, $24,000 is usually the most you can contribute each year.
3. Make sure you are contributing money into an IRA. Whether you are eligible or better off contributing to a Roth IRA or a Traditional IRA may be worth using a lifeline on to ask your financial advisor or CPA, but the important thing is that you are saving and investing money. For people with earned income under age 50, $5,500 is usually the most you can contribute each year. For people with earned income over age 50, $6,500 is usually the most you can contribute each year.
4. Make sure you are saving money in a taxable account. Saving money in your employer’s retirement plan and in an IRA is great, but you aren’t really supposed to access that money until your mid to late 50s. If you do, you may be subject to ordinary income taxes and a 10% penalty, so you want to make sure you invest some savings along the way into a taxable account that you can access anytime you want to or need to. Withdrawals from a taxable account don’t come with tax penalties, and if you withdraw from assets you’ve had invested for over a year, you could receive the usually more favorable capital gains tax treatment.
5. Avoid debt and attack what debt you can’t avoid. Pay off all your credit cards every month. Pay off your student loans as fast as you can. Pay off your car loans as fast as you can or maybe even save up enough cash for your next car. See if you can get your debt down to monthly credit cards and your mortgage, and then put a little extra towards your mortgage whenever you can. It will save you interest expense and help you get debt-free sooner.
6. Protect what you have. Some people try to save money on insurance. That’s very wise to an extent, but you, your family, and your stuff needs to be adequately covered. Having sufficient health insurance, disability insurance, homeowners insurance, and auto insurance is critical. On top of that, having an extra layer of liability insurance (an umbrella policy) equal to the value of your assets is a very wise and surprisingly inexpensive idea. (Sufficient life insurance is important, too, but today we’re focused on making you a millionaire, not your loved ones should you get hit by a bread truck…)

As promised, here is a link to your trivia question. How much money would you have today if you invested $1 in the S&P 500 every day since you were born? I think it’s an interesting thing to know, and I think it helps an investor keep things in perspective as to where we’ve been and where we are now even though all we’ve been through and all that undoubtedly lies ahead.

That’s my final answer.

-Tom

What You Should Do With More

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Earlier this fall the U.S. Census Bureau released exciting data showing that real median household income grew an average of 5.2% in 2015 versus 2014. This represented the first statistically significant increase in income for the middle class since 2007. For the first time in almost a decade, most people have gotten a raise! This good news coupled with it being near the end of the year when sometimes employees are lucky enough to get a raise or a holiday bonus got me thinking that it might not be a bad time to suggest some things you might want to do with your additional income.

If you are fortunate enough to have additional income coming in, in general, here is what I would recommend you do, and in this order:

1. If you are getting a raise, do a little math and see how much more money you will be bringing in each pay period after taxes. That is valuable information to know as you consider your budget going forward.
2. Have some fun! Sure, I’m a numbers guy and a financial advisor, but I also know you only live once. Celebrate your hard work paying off and go eat at that new Italian place, buy that outfit you’ve had your eye on, or get that latest device. Now I’m certainly not suggesting you should blow all of your additional income, but I do think you should live just a little.
3. If your cash rainy day / emergency fund is still not up to at least 3-6 months’ worth of your living expenses, it’s probably a good idea to direct your additional income to rectifying the situation. It’s not an exciting use of assets, but trust me, you will be glad you have a cash safety net in place when life throws you a curveball, and it will!
4. As long as your modified adjusted gross income (MAGI) is below $132,000 if you are single or $194,000 if you are married and file a joint tax return, you should be eligible to contribute up to $5,500 to a Roth IRA ($6,500 if you are over age 50). This is a great way to save for retirement, and with any luck, your savings will compound over time into a larger tax-free asset.
5. If you have any high-interest credit card debt or you are close to paying off a student loan or car loan and that will erase a fixed, monthly expense, I’d suggest you plow your additional income into your liabilities. It will save you interest expense and improve your financial situation.
6. Top off your 401(k) or retirement plan. Unless you are already contributing the maximum amount, with additional income you should be able to contribute more to your retirement plan. This is a great way to boost your retirement savings and defer having to pay taxes on your additional income until you withdrawal money from your retirement plan later on.
7. Put some extra towards your mortgage or other long-term debt. Again, it’s not an exciting use of your assets, but it will save you interest expense and speed up your progress towards being debt-free!
8. If you are already charitably inclined, consider paying it forward and using your additional income for enhanced charitable giving, greater support of a cause you feel passionately about, or just helping out someone who you know could use a little help.

 

They say with more power comes greater responsibility. I agree, but I’d also say with more income comes greater possibility! If you are fortunate enough to have experienced a bump in your income or know you are about to get a raise or a bonus, use it thoughtfully. Have a little bit of fun, but also make it count!

 

-Tom

Is Your Arrow Aimed Too Low?

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I am by no means an archer, but I have shot a bow and arrow from time to time. In Boy Scouts I launched a few arrows as part of a merit badge, and as a college student I competed with my roommates as we slowly made the top of a Styrofoam cooler look like Swiss cheese striving for the bullseye. It was fun, but believe me when I tell you that you wouldn’t want me to be your William Tell!

As you might expect, aim is pretty important when it comes to a bow and arrow. Aim too low and you’ll never hit your target. Aim too high and you’ll overshoot your target. Many people view financial goals as targets, and I think the same principles apply. That’s why I’d like to share a few thoughts with you on the importance of aiming your financial arrows to actually hit your financial targets.

In my experience I’ve found that people usually have more concrete targets than they have arrows. Most people have a general idea where they want to go and they may even know when they want to get there, but they don't always know if they're headed for the bullseye. This is where financial planning comes in to make sure you are not just shooting in the dark.

I meet with many people in their 20's and 30's who are carrying around loads of student loans. They are usually making their monthly payments, and in some cases even putting extra towards their loans, but their payment arrows are often flying all over the place. They know they want to eliminate all student debt, but they aren’t using their arrows as efficiently as they could. By prioritizing paying down the loans with the higher interest rates rather than simply making the automatic payments that are based on the size of the loans, they can ultimately pay less interest and hit their debt-free target faster!

I also meet with lots of people who share with me their goal of paying for their children’s education. It’s an admirable and loving goal, but the problem is that sometimes I find that the parents need those funds for their own retirement. Sometimes I also find out that the "child" we are discussing is a senior in high school. Either way, saving is best done over time with small savings arrows, rather than with a last-second, giant contribution.

My bread and butter is meeting with people contemplating or nearing retirement. Most of the people are not comfortable or convinced that their nest egg, Social Security, and any retirement pensions or income they may have are enough to provide for their desired retirement lifestyle by their desired retirement date. Sometimes I find people’s expectations are pretty well lined up, but other times I find people's expectations way off. I’ve had to tell someone who hated their job that they actually could have retired much earlier because their savings arrows had been aimed so high. I’ve also had to tell someone who had practically cleaned out their desk that they weren’t headed to a beach anytime soon because their savings arrows had been aimed too low. A challenging, but much easier conversation for me (and whoever I’m advising) is sharing with someone several years out from retirement that they need to aim their savings arrows a little higher and push their realistic lifestyle target expectations in a few yards in order to make things work, or better yet, that they really are on target for their retirement bullseye or better.

Aim too high with your financial goals and you could be missing out on opportunities and experiences now. Aim too low with your financial goals and you might not pay off your debt in a timely fashion, you might not be able to send your child to college, and you might not be able to retire with the lifestyle you’ve always wanted. If your aim is just right, you're either incredibly lucky or you’ve done some financial planning.

-Tom

Failing to Plan

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I don’t know about you, but the beginning of the year is when I usually do my greatest amount of planning. New Year’s resolutions, vacation itineraries, home improvement lists, and fitness routines can currently be found in my personal effects. Maybe I’m too rigid. Maybe I’m not spontaneous enough. What can I say? I need a plan of attack. Without one, I feel lost.

A lot of people I meet for the first time seem to view financial planning like a trip to the dentist. It’s not always fun, and you might not look forward to it, but it is necessary to keep your teeth clean and avoid a root canal. I’m no dentist, but I do firmly believe financial planning is necessary to accumulate and grow your assets, and to avoid the many financial potholes lurking around out there.

• Consider someone facing the huge burden of paying for their child’s college tuition the next four years versus someone who started a 529 Plan for their child eighteen years ago.
• Consider someone who wants to retire a year from now, but can’t possibly maintain their lifestyle in retirement versus someone who implemented a debt-reduction plan ten years ago so they could coast into retirement debt-free.
• Consider someone who made a generous charitable contribution the year after they retired when they were in a low tax bracket versus someone who more strategically made a generous charitable contribution right before they retired when they were in a high tax bracket.
• Consider the family of someone who is left in a coma after a tragic automobile accident with no estate plan in place versus the family of someone who took the time to execute a will, a Power of Attorney, and a Health Care Directive.
• Consider the family of someone killed in an automobile accident who never wanted to bother with the health questionnaire for life insurance versus the family of someone who made sure their family would be financially secure in the worst of circumstances.

 

Oftentimes it is better to be lucky than good, but I’m not always that lucky. I need peace of mind and confidence in my family’s financial security. I’m a firm believer in Ben Franklin's famous words that "If you fail to plan, you are planning to fail."

 

Just as a dentist can help a toothache, people often come to me at a time of financial crisis like imminent retirement, unexpected termination, a surprise job offer, a birth, a health tragedy, a death, or a divorce. Yes, I can certainly help, but it’s much easier and there are so many more options if you plan ahead. Maybe it’s me, but I prefer flossing a little along the way and having a few checkups every year to a painful toothache and a drill!

 

-Tom

Your Sunny Day Fund

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One of the terms you have most frequently seen in my 146 (now 147) blog posts since 2012 is “rainy day fund.” It’s an unhappy term, but a necessary pillar of financial security. Cars break, houses fall apart, people get sick, and people lose their jobs. If people don’t have enough money saved up to get them through their unique personal thunderstorms, things don’t usually go so well. You need enough cash to be able to get through dark financial times. It’s as simple as that. I haven’t met many people who disagree with me on that premise, and I can tell you from experience that it usually doesn’t take very long for someone who is serious about financial security to build up a reasonable rainy day fund.

After someone has a rainy day fund, I frequently recommend that they work on saving more and investing more for things like the next car, the second home, and most importantly, retirement. I’ve found that there are some highly motivated, goal-driven people who go after hitting their savings and investing goals with the same vigor with which they built a rainy day fund, but I’ve also observed that a lot of people seem to lose “steam” or momentum. Why is that? I think it may be because saving for future wants and needs requires a little more self-control. It also lacks a catchy name.

So today, I’d like to throw out a happier term that I first heard on the radio as part of an advertisement for a national bank. I’d like to start calling the brokerage accounts, 401(k)s, and IRAs that you are saving into for your future your “sunny day fund.” Doesn’t that have a nice, warm glow to it? Doesn’t it have a better ring than some of the hideous titles bestowed upon employee savings vehicles? I think so!

As I’ve often said, my greatest concern for current workers, and particularly those of my generation and younger, is that the rules of the game are changing. Retirees once had pensions, Social Security benefits, and their savings to get them through the rest of their lives, but today’s workers will have to rely much more heavily, if not entirely, on their savings to get them through the rest of their lives. Sadly, I believe this means the days of being able to save very little and still retire with a reasonable income are numbered.

Saving and investing for your future are critical. It’s more fun to spend now, there’s no question, but I hear it’s also nice not to have to work until the day you die. Working towards that dream car, that vacation home, and those annual family trips by saving and investing now can be fun, too! Maybe it doesn’t feel as fun in a brokerage account, 401(k), IRA, or another type of account, but I really think it can be fun if you tweak your perspective just a little bit and decide that you are saving and investing to accumulate enough assets to propel yourself through the golden years. The bigger your sunny day fund becomes, the brighter your future could be.

-Tom

What If It’s Not Working?

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Money comes, money goes. You get paid. Wahoo! Then the cable bill comes... Then the phone bill... Then the water bill, power bill, car payment, and house payment all come on one, lovely day. @#$%! This is the month when homeowner’s insurance premiums come in? Did you forget about that? (I know I did!) Wow. There’s just not that much more left than before you and I got paid! And we’re supposed to go to that new, pricey restaurant this weekend with our friends… Do you ever feel like this? I think most people do.

So what should you do when it’s not working? You’re certainly working hard, and you’re reading all of those helpful financial blogs every time your friend pumps one out (hopefully), but your financial situation is just not improving that much. What should you do? In three words:

Try something different.

If you’re having trouble saving money, open a second cash account and direct deposit a portion from each pay check into it. Pretend it’s another one of those deductions on your check no one really understands, and I bet your cash will finally build!

If you’re having trouble paying down your credit card debt or you keep “overusing” your debit card, play rock, paper, scissors with your plastic cards and go with scissors! Cut them up into a lot of pieces (to help reduce the chance of identity theft), and try using cash. When you see how many pictures of Andrew Jackson or Benjamin Franklin something takes, it may feel different and help your self-restraint.

If you’re having trouble actually increasing your contributions to your retirement plan at work, think Nike - just do it! As long as your increased contribution isn’t horribly unreasonable, you’ll probably naturally figure out how to make your reduced income work once you have less income actually coming in.

The one I’ve actually seen a lot of lately is someone trying to do too many good things at once. I admire people who do this, but let’s be realistic; you can’t boost cash, pay down debt, save for a new car, save for a new house, save for your kid’s college, save for your kid’s wedding, and save for that long overdue dream vacation all at the same time. I mean you could, but unless you’re making really big money, that “shotgun approach” isn’t going to work. Based on my experience, most people taking the “shotgun approach” end up feeling like they aren’t making any progress, get frustrated, and then return to spending what they make. Instead, I’d suggest that you go with a “surgical strike approach,” and go after one or only a few items at a time. Boost cash, then pay down debt while keeping your cash up. Save for a car, buy a car, and then save for the new house. This way you will feel like you are making financial progress because you are accomplishing something that is tangible and observable. Things will get checked off your list, and you may find that your rate of financial progress seems to pick up momentum.

If what you are trying to do financially isn’t working, don’t feel bad. When talking about his many attempts to invent the lightbulb, Thomas Edison said that he had not failed, he’d just found 10,000 ways that didn’t work! Edison also said, “Our greatest weakness lies in giving up. The most certain way to succeed is always just to try one more time.”

If you don’t want to listen to this Thomas, that’s fine, but please listen to Thomas Edison. Try one more time!

-Tom

Landing the Plane

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Many of you know that I love analogies. One of my favorites that I use with people who are nearing the end of their careers is that they should think about entering into retirement like landing a plane. Whether the gainfully-employed ride has been smooth sailing or more than a little turbulent doesn’t really change the fact that you need to be prepared to land the plane. The retirement landing can be graceful and you can reach your home destination smiling, or the landing can go pretty poorly and even end in a fiery crash of sorts. Most people prefer the graceful landing that ends with smiling, so if you’re thinking about retirement, I thought I’d share a few tips on how you might want to land your very own plane.

1. Get Your Cash Up – When working, I recommend most people keep around three to six months’ worth of their core living expenses in cash. In retirement, I’ve found that most people prefer a little more. If you have a particular cash number that helps you sleep better, go for it, but otherwise I normally recommend one to two years’ worth of your core living expenses in cash. That may sound a little crazy to you, but when your paycheck goes away (or goes down) when you do retire and there is a cyclical pullback in the stock market, you might feel differently.
2. Have a Plan for Where Your Income Will Come From – If you have a pension, that’s really great, but where is the rest of the cash you need to fund your lifestyle going to come from? Randomly pulling cash from various investment accounts and haphazardly deciding when to turn on an annuity or start drawing Social Security is usually not a good strategy. You need a plan! There are tax implications and timing implications that need to be considered if you want to land as efficiently and effectively as possible!
3. Strive to be Debt-Free – This may require using a decent chunk of your assets, or you might even decide that you want to work a year or two longer so you can do this, but if you can go into retirement debt-free, it is huge! Imagine how it feels to still get that mortgage bill you’re used to when you’re not getting that pay check you’re used to. Being debt-free going into retirement not only really seems to help many of my clients psychologically, but it also helps take pressure off cash and investment accounts. If your monthly mortgage payment is making up a sizable chunk of your fixed expenses, and you can make it disappear before you lower your landing gear, I’d be willing to bet you’ll feel a lot better.
4. Make the Big Purchases Before You Retire – What? I’m telling you to spend money? Well, sort of. This may also sound a little batty, but if you are going to need something such as a new car or a new roof in the next couple of years, I’d probably suggest you go ahead and accelerate that purchase while you’re still working and making the big(ger) bucks. Assuming your retirement income will be a little lower than your working income, I’ve found that going ahead and taking care of some of the big ticket items can make your landing feel a little smoother. Put simply, big expenses can hurt the psyche and the pocketbook, but they seem to hurt less if you’re still working.
5. Get to Know Your New Boss/Co-Worker – I’m certainly not a therapist, but I am observant enough to have noted that some people’s transition to a little more family time seems to go better than others. Sure, you’ll have to get used to spending a lot more time with your husband or wife, but that knife cuts both ways; they will have to get used to spending a lot more time with you, too! Working to improve your relationship with your spouse and developing some mutual and separate activities before you retire are probably really good ideas. I’ve heard it said that retirement is twice as much spouse and half as much money! I don’t know about that, but you get the point. Consider some relationship planning before you exit your plane and head to baggage claim.
6. Think About What You’re Going to Do Once You’ve Landed – I know I said I’m not a therapist, but you need a plan for you when you retire. My busy, ambitious, and hardworking clients who eat, sleep, and bleed what they do for a living tell me that retiring can feel like jumping off of a moving train. The emotions of that jump and coming to a relative stop can be a tough adjustment. Take a trip, sleep in for a few weeks, do the crossword, but have a plan for after that. Things such as volunteer work, periodic consulting, gardening, car restoring, or woodworking can be good things. You’re going to want to have something to do. Retiring is a treat for some, but I’ve seen it be a difficult pill for others to swallow. Do as you wish, but I’d suggest you have some hobbies and groups lined up before you bid your boss adieu.

 

I don’t know about you, but I think the landing is one of the most important parts of a flight. If you’re beginning your descent and could use a little help making your approach, please let me know. This has been your captain speaking.

 

-Tom

Quit It!

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A lot of my posts aren’t meant to get you to actually do something. Most of them are just supposed to make you think about life and your finances, and occasionally laugh a little. Some of my posts are more of a “call to action,” where it is my hope that you will either continue doing the good practices you are already doing or change potentially troublesome ways and proceed differently. Either way, today’s post is a little different. I’m not going to suggest that you do this or that you do that. Instead, I’m going to share several, common, bad financial habits that I see a lot of and ask you NOT to do them.

1. Carrying a Credit Card Balance – You should pay off your credit cards each and every month without exception, period. If there is an exception or you’re not at a place where you can pay off all of your credit cards, you really should adjust your lifestyle until you can. The impending doom of credit card debt and its frighteningly high interest rate(s) just aren’t worth it. Use credit cards for your convenience and to earn perks, but not to buy what you will have trouble affording.
2. Having Too Small of a Rainy Day Fund – Do you really have savings? I’m not just talking about specifically having a savings account – I mean actual savings. If you could not withstand a temporary period of unemployment, you could not afford a used car should something happen to your current mode of transportation, or you would have trouble paying your maximum health insurance deductible, you probably haven’t saved enough. Sure, it’s not fun seeing all of that cash just sitting there, but it does feel good knowing it’s there if you need it, and unless you’re a lot luckier than most, at some point in life, you are going to have a rainy day.
3. Having No Idea Where It’s Going – Want to try something that can be a little scary? Annualize your take-home pay (your paycheck after taxes, insurance, 401(k) savings, etc.), and then back out your annualized fixed expenses such as your mortgage, car payment, and utilities. What happened to all that’s left? Where did it go? If you can’t speak to where a large part of your remaining income went, that may mean you could have better utilized your cash flow towards savings, investing, and debt reduction as opposed to, well, wherever it went.
4. Saving for College, Not Retirement – This one leads me to a serious and not so pleasant question: Would you rather your child have to pay for college or have to pay to look after you in retirement? I know the answer is neither, but in some cases, that may not be an option. Saving for a child’s college expenses is an admirable act of love, but it probably should not be done if it jeopardizes your own financial independence. Children could get scholarships, they could be athletes, they could be artists, and they might not even want or need to go to college. Save for both if you can, but please remember that looking after your own retirement is helping your children in the long run, too!
5. Letting One Spouse Do It All – Unfortunately, I see this time and time again where one spouse is the dominant financial spouse. I’m not necessarily talking the largest “bread winner” here, I’m talking about the situation where one spouse pays all of the bills, balances all of the cash accounts, knows all of the passwords and secret question answers, and keeps all of the files. As long as no one becomes disabled, decides to get a divorce, or dies, having a dominant financial spouse could be fine, but it is a little dangerous. If you have a spouse, I’d encourage you to either split up and alternate some of the duties or at least agree to formally go over your finances once or twice a year. This builds trust, leads to good conversations, and helps make sure the back-up financial quarterback gets some reps should the starting financial quarterback go down.

 

If you’re reading this post, it’s my hope and belief that you are already not plagued with many of these bad habits, but if you are, quit it! If you know a friend or family member who is plagued with some of these bad habits and think of this post, please share it!

 

-Tom

What You Need to Save to Reach $1M

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There is something magical about one million dollars. A lot of people seem to view it as the line between rich and not rich. I don’t buy that as I’ve seen plenty of people with less than seven digits who are personally and financially wealthy, and I’ve seen plenty of people with seven digits or more who are personally “starving” and somehow still feel financially poor. Now that I have car payments and house payments and see taxes and health insurance expenses deducted from my paycheck, I can also see how, over time, someone could go through a million dollars. I think it’s the act of having to use a second comma to write out "$1,000,000” that makes it such a big deal.

I don’t know whether you’re trying to become a millionaire or not. I don’t know whether you’re going to have a pension, what your Social Security may or may not look like, or what type of lifestyle you are looking to sustain in retirement, so I can’t really tell you that a million dollars will even be enough for you. Besides, who knows what taxes will look like when you are ready to retire? Who knows what inflation will be between now and then? What I can tell you is that saving and investing is important, and that saving and investing sooner rather than later can have a critical impact on your future outlook.

Below, please take a look at a graph showing how much you would need to save per year, based on when you start saving (assuming a flat, six percent annual rate of return), to reach one million dollars by age 65.

For me personally, all of these annual savings figures represent a significant amount of money, but some of them look a lot more feasible than others. If you start saving early by living below or at least within your means, you save diligently paycheck after paycheck, and you have a little bit of luck and good fortune, I think most people should have a shot at saving up a lot of money for retirement - maybe even a million bucks! That being said, if someone keeps buying the latest gadget or accessory, living paycheck to paycheck, and carrying on like there is no tomorrow, starting to save at age 55 or so is not going to be a lot of fun, and more frighteningly, it might not even do that much good.

In short, no matter how old you are or how much you can save, I’d suggest you start saving now! In the words of the hit novel and movie franchise The Hunger Games, by saving now, the odds will be ever in your favor.

-Tom

What Mark Twain Might Say

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You might think that a vast majority of my job as a financial planner would involve number-crunching, graph-making, and technical reading. My job does encompass some of those activities, but I have found that the majority of my time is actually spent counseling people. Sure, many of my conversations with clients involve talking people through the financial pros and cons of things such as moving, starting a family, or retiring, but a lot of my counsel and advice sometimes borders on being more personal. With that in mind, I’d like to share some thoughts based on tough conversations I’ve had recently with some people about their jobs.

I read recently that the average workweek in America has crept close to 50 hours a week, or 2,400 hours per year. Many of my clients seem to affirm that statistic, and sadly, make me wonder if that statistic might be a little understated. Either way, 50+ hours a week means that outside of sleeping, eating, commuting, and football, there’s not a lot of time left for anything else. I imagine I could write a couple of books on how your job can interfere with your family, friends, health, and faith if you’re not careful, but I’m just a humble blogger. So to summarize, let me just say that legendary adventurer and intellectual, Mark Twain, provided one of my favorite quotes as I went through school: “Don’t let schooling interfere with your education.” I bet he’d offer something similar in regards to work and life. I might even speculate that he would have said something along the lines of: “Don’t let work interfere with your life.”

“There is a limit to how much I’m willing to work no matter how much they pay.”

“If I quit working, I’ll have to spend time with my wife.”

 “Since I’ve retired, I thought I would have heard from my former co-workers more.”

“The way I’ve worked, there’s no way I’ll make it past 80.”

“I have to sleep on Sundays, or else I’ll never make it.”

Unfortunately, those are all quotes I’ve heard from various acquaintances, clients, and friends over the past few weeks, and frankly, it makes me very sad. My parents raised me to give 100% towards everything I do, and I’ve made that mantra part of my core personality, but as I’ve gotten older, I’ve also learned there is an important caveat to always giving all that you possibly can. I believe there is only so much one person can give, and I know you only live for so long, so if you’re giving too much to your career, chances are you’re not giving enough to another area of your life, whether that be your own happiness, your own health, your family, your friends, or your faith.

Just as I would never have the audacity to pressure someone about what they should do with their money, I would never tell someone how they should live their life. One of the differences between being a trusted financial advisor and a broker is that a trusted financial advisor is supposed to be more interested in your overall well-being than just your money. In short, I believe it is my duty to do what is best for clients, and as you might expect, what is best for someone personally and what is best for someone financially isn’t always the same thing. I don’t take lightly the opportunity to help people talk through what’s going on in their personal lives and to help them consider the current and future financial impact of any decisions they’re thinking about making. Seeing people go to less financially lucrative jobs that give them weekends, seeing people take that family vacation they kept putting off, and seeing people change careers to something they actually find enjoyable and meaningful makes me happy. In my opinion, you need to put food on your table and a roof over your head, but life is too short to let work ruin your life. 

As I’ve said before, I love math, numbers, history, and trying to keep up with all that’s going on in our crazy little world, but I do what I do so that I can help people. If today’s post speaks to you, I hope you’ll give it some serious thought. If you need a neutral party to listen or to help you think things through financially, or even personally, please know I’m here for you.

-Tom

A Traditional 401(k) vs. A Roth 401(k)

Credit: Stuart Miles

Another question that came up a few times from readers submitting questions for The Lightning Round was whether I would recommend a Traditional 401(k) or a Roth 401(k). This is actually a very difficult question to answer because it depends on the future tax rates of the individual asking the question. I tried to write an answer (I really did), but I also know that there are times when writing less is worth more. I think this is one of those times. Let’s look at an example…

Suppose Tom has two different 401(k) contribution options. With option one, he can contribute to a Traditional 401(k) plan where pre-tax income is deducted from his paycheck and placed in a tax-deferred account. Tom will have to pay taxes when he takes withdrawals from the account in retirement. With option two, he can contribute to a Roth 401(k) plan where after-tax income is deducted from his paycheck and placed in a retirement account. In this case, Tom will not have to pay any additional taxes when he takes withdrawals in retirement. Suppose Tom’s tax rate is 25% as he contributes and will remain 25% in the future when he takes withdrawals in retirement. Suppose Tom contributed $5,000 per year from his paycheck. Suppose Tom’s investments return a steady 5% per year.

     What would happen if Tom went with a Traditional 401(k)?

     What would happen if Tom went with a Roth 401(k)?

Are you surprised to see $21,239.15 as the answer to both scenarios? Don’t be! In the Traditional 401(k) scenario, Tom is deferring paying taxes now, so it’s only fair that he pays taxes on his contributions and earnings in the future, right? However, in the Roth 401(k) scenario, Tom is paying the piper (aka the IRS) up front, so why should he be taxed any more on his contributions or earnings years from now?

Great. I’ve mathematically proven to you that it might not make a difference whether you decide to go with a Traditional 401(k) or a Roth 401(k). How does that help you? I hope it helps you focus on the fact that saving for retirement is what really matters, not the Traditional vs. Roth decision.
If you’re expecting to have higher income in retirement than you do now (from things such as Social Security, a pension, or a large inheritance), I’d normally recommend you go with a Roth 401(k). If your income (and your tax rate) will be higher in retirement than it is now, there may be a mathematical difference between choosing a Traditional 401(k) and a Roth 401(k), and a Roth 401(k) will likely be in your favor.

If, like most people, you’re expecting to have a lower income in retirement once your big salary goes away, I’d normally recommend you go with a Traditional 401(k). Save on taxes now while you’re at a higher tax rate and gladly pay taxes on your retirement withdrawals at a lower tax rate when your income is lower. If your tax rate is lower in retirement than it is now, there may be a mathematical difference between choosing a Traditional 401(k) and a Roth 401(k), and a Traditional 401(k) will likely be in your favor.

That leaves one last question. What if tax rates or tax law change between now and when you retire and take withdrawals? Neither of us knows the implications of such a change until it is implemented, but based on our growing federal deficit, I’d guess that if tax rates are going to move, they will be going up. If you’re still on the fence choosing between a Traditional 401(k) and a Roth 401(k), that logic might be a small nod to the Roth 401(k).

In closing, saving is what matters the most – not whether it’s a Traditional 401(k) or a Roth 401(k). If you expect higher taxes in retirement, go with a Roth 401(k). If you expect lower taxes in retirement, go with a Traditional 401(k). If you’re still unclear or nervous about tax rates in the future, hedge your bets - contribute half to a Traditional 401(k) and half to a Roth 401(k). You’ll be half right!

-Tom

Why You Might Not Want to Retire Early

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I’ve spent the last several weeks sharing some advice for you to consider if you want to retire early. So why in the world would I wrap up The How to Retire Early Series with a post about why you might not want to? It’s because there is certainly more to life than finances!

Most people work to provide a shelter over their head and clothes on their back. Some people hate their job, but they go to work every day anyway to make ends meet and for their family’s well-being. Some people tolerate their job, but they are ready to quit just as soon as they are confident that they are financially able to. Other people love their job, and truth be told, they’d be happy to keep doing what they’re doing long after they reach financial independence. I can respect being in all of these positions, but if you love your job, and you still get a lot of fulfillment and satisfaction out of doing your job, why quit? From a financial perspective, the longer you work, the better off you probably are, so why not? From a life perspective, if you love tennis and are still healthy enough to play, I wouldn’t think of telling you to quit. The same holds true for your job.

Related to finding fulfillment in your work is avoiding boredom. The clients I’ve helped financially transition into retirement often equate retirement to jumping off a moving train. I can imagine so. What will you do without all of those emails, voicemails, and staff meetings? Watching daytime television gets old in a hurry, and you can only travel so much, so I think it is important to have an actual plan in place to avoid boredom. Think back to what summer vacation felt like at times as a kid. In retirement, there is no “back to school” date. This is great news to some, and believe it or not, horrible news to others. If you’re afraid you’ll be bored in retirement, start exploring hobbies, social groups, and volunteer opportunities at your convenience while you’re still on the train and before you’re bored.

Before retiring, you should also consider your relationships with your friends and family. If all of your friends are co-workers and the thought of nine to five with your children or spouse is truthfully a little discomforting, you may want to work on the relationship transition before you retire. I can attest that most co-worker friends fade away once you become a few weeks removed from the workday grind. It's nothing personal - just the principle of being out of sight, out of mind. As far as family, I’m not a licensed counselor by any means, but going from seeing your family two days a week and at dinner to all day, every day, seems like it could be a challenge for both parties involved. (Hey. they have to get used to you being around, too!) Between my friends’ parents and the clients I work with, I’ve seen this transition go well, and I’ve seen it go terribly. I’m not suggesting you continue working to have co-worker friends and avoid your family; I am advising you to be cognizant of the relationship transition before you hand in your ID badge and focus on nurturing those relationships now.

If you’re still enjoying your job, but you do want to reduce your stress or workload, can you consult or go to part-time instead of totally retiring? If you’ve had more than enough of your current job, is there something totally different you can do to still earn a little income? Do you have a hobby that you could further embrace such as wood carving or craft making that could generate a little money for you? All of these strategies can help you retire slowly as opposed to all at once. This could help the financial transition, fulfillment transition, boredom transition, and family/friend transition be more gradual as opposed to night and day.

As people continue to live longer and longer, it’s quite possible you could spend more of your life in the retirement phase than you did in the working phase. This means you have to get retirement right, especially if you’re going to retire early.

If you would like to look at where you are now versus where you need to be to live the way you want to live in retirement, I’d be happy to sit down with you. If you have already retired but would like a “second opinion” as to how you’re doing, if you’re going to make it, and if there is anything you can do to enhance your retirement picture, I’d be happy to try to help you as well. In the meantime, I’ve got to get back to work so I can retire early myself! I’ve got a reservation with a beach chair many years from now, and I don’t want to be late!

-Tom

Retirement Cash Flow Strategies

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For most people, cash flows in retirement look different from cash flows while working. The difference is a transition that I have helped many clients through. Cash flow strategy is one of the most important parts of planning for retirement, but it can be complicated since cash flows frequently come from different sources, start at different ages, and carry varying tax implications. People who develop a good plan and stick to it can often add stability and peace of mind, take advantage of tax saving opportunities, and even generate more income in retirement. Let’s look at a few areas:

• Pension Annuity vs. Lump Sum – For retirees who get to choose a pension payment option, this can be one of the most important decisions they ever make. Actuarially speaking, there’s a good chance that your employer is thinking they are offering you the same amount of money whether you elect an annuity or the lump sum, but there are still things to consider. A lump sum offers a surge of money at retirement that can be more easily passed on to your heirs and better protect your purchasing power against inflation if it is properly invested, but a majority of clients I work with seem to find comfort in choosing the annuity option. In most cases, the monthly annuity amount will remain the same until the day you die. This may not help you against inflation, but if you live long enough, it could eventually mean more total money for you. In the meantime, an annuity feels like a paycheck, which is what retirees are used to, and the mental comfort that brings is the main reason I am usually a supporter of a pension annuity election. I also advise most clients to select a “joint and survivor option” if it is available so that a surviving spouse won’t lose their loved one and the benefits of their loved one’s annuity at the same time. This tactic usually costs the spouse whose pension it is a little bit of cash each check, but it can be a tremendous comfort to the other spouse.
• Required Minimum Distribution Planning – I’ve discussed this before, but age 70 ½ is an important half-birthday! I won’t take you back through all of the details we covered in my post “Required Minimum Distributions,” but I will say that you should factor this into your retirement planning. If things are a little tight on you before you have to start these distributions, or if the distributions are going to put you in a higher tax bracket once they begin, it may make sense to start prudently withdrawing from your retirement accounts before 70 ½. This could save you tax dollars and allow you a steadier lifestyle throughout retirement as opposed to cutting it close in your 60s and rolling in cash in your 70s. It’s just a thought, but one you should consider if you’re over 59 ½ (there could be penalties if you withdraw from retirement accounts before 59 ½).
• Social Security Strategy – Many people, including me, are concerned about the long-term solvency of the program as we know it going forward, but there are some Social Security strategies you should consider if your retirement cash flows are doing just fine when you turn 62. If you decide to claim Social Security retirement benefits at age 62 (the earliest applicable age), you are deemed to be collecting benefits “early,” and will only receive around 75% of the benefit you would receive at your “full retirement age.” (Currently, full retirement age is usually between age 66 and 67 for most people, but take a look at this chart to find your specific full retirement age.) If you wait until your full retirement age, you can receive 100% of your benefit, but if your retirement cash flow is still doing just fine at your full retirement age, it might be worth waiting until age 70, when you could receive around 132% of your benefit! That’s around 8% growth per year from age 66 to age 70, and that’s not a bad investment return if you ask me! Putting off claiming Social Security could provide you with more money in retirement if you live long enough, but at the same time, you could be shooting yourself in the foot if you end up passing away relatively young. I would suggest you consider your health and family history, and then consider how much Social Security income at age 62 would help before you decide to delay filing. If you do decide to delay, you can always start before your full retirement age or age 70 if you need to with a partially higher amount of benefits, but it’s probably not worth having beanie weenies in your 60s so you can have filet mignon in your 70s.

I hope you’re beginning to see that if you consider your spending and saving now versus later, the importance of starting off strong, your humble abode(s), your health insurance, and your retirement cash flow strategies, that there are many things you can do to put yourself in the position of having a chance to retire early. That being said, I’ve met plenty of people who could retire early but don’t and plenty of people who did retire early and wish they hadn’t. Some even went back to work! The How to Retire Early Series will conclude next week with a look at why you might not want to retire early even if you followed the advice of my previous posts and could. I hope you’ll check it out.

-Tom

The Health Insurance Hurdle

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Back in the good old days, large employers used to offer health insurance to their retirees. Maybe you had to work a certain number of years or work to a certain age to qualify, but this retirement benefit made things pretty easy. You retired, you stayed on your employer’s health insurance until age 65, and then you hopped on Medicare. Easy peasy.

Unfortunately, as of 2012, only 25% of large employers still offered health insurance to retirees, and with the number of retirees growing and health care costs continuing to rise, I would expect that number to continue to decline. This leaves people hoping to retire before age 63.5 (most people can retire and stay on their employer’s health insurance for up to 18 months by signing up for COBRA) with a bit of a problem. How can you possibly retire early and have health insurance? This hurdle has kept many people working longer than they wanted in recent years, and for good reason. Buying a health insurance policy in your 50s or 60s can be very expensive, and if you have a condition such as diabetes or heart disease, or had a bout with an illness such as cancer, it could be downright impossible. As of January 1, 2014, the rules of the game changed.

(Now I’m about to wade into one of the most politically charged, hot-button issues for a minute, and regardless of how you feel about the Patient Protection and Affordable Care Act, I need you to stay with me. This post is about retiring early and having health insurance, NOT about a law that has done some good and some bad.)

You see, as part of the Patient Protection and Affordable Care Act, insurance companies cannot discriminate against early retirees who have pre-existing conditions such as diabetes, heart disease, or cancer. The newly created public insurance exchanges are also run like large company or group plans, so even though most early retirees are on the older end of the insurance pool of people, the inclusion of younger and statistically healthier people should theoretically lower the cost for an early retiree seeking health insurance. If the cost of buying a health insurance policy to bridge you from retirement to Medicare just became cheaper (some would argue about this), and your ability to buy a health insurance policy to bridge you from retirement to Medicare just became more possible (you can’t argue about this), then the health insurance hurdle to retiring early just got a lot lower!

If you are fortunate enough to work for a company that offers health insurance to retirees, you are very lucky. If you’re like most people and your employer does not offer health insurance to retirees, you need a game plan. Retiring without insurance is not a good option. One big medical problem might not kill you, but it could kill you and your family financially. 

Before you run through the halls naked or start singing that song in a staff meeting about your employer taking your job and… (putting it elsewhere), you need to have the health insurance hurdle figured out. Maybe you can jump on your younger and still-working spouse’s plan, maybe you’re pretty healthy and can find a good deal on a private policy, or maybe you’ll have to keep your fingers crossed and hop on healthcare.gov, but you’ve at least got more options today than you did last year. Either way, if you want to successfully retire early, you need to take the time on the front end to figure out how you can best have health insurance between your retirement date (plus 18 months on your old employer’s health insurance through COBRA) and age 65 when Medicare kicks in, and you need to factor in the cost of that health insurance before you just sail away.

-Tom

Your Humble Abode(s)

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I want you to think about a few things with me. Think about how much the property taxes are on your home. Think about how much your homeowner’s insurance costs. Think about your monthly water bill, gas bill, and electric bill. If you pay someone to mow your lawn, think about that. Do you have an exterminator or a cleaning person? What about the annual fee for your alarm system monitoring? Do you have HOA fees or neighborhood dues? Do you need a pencil and paper yet to add all of that up? Don’t forget there are also those periodic home maintenance surprises that come up like replacing an air conditioning unit, hot water heater, dishwasher, or roof. The point I’m trying to make is that owning and maintaining real estate is expensive.

If you’re a homeowner you already knew that, but have you ever thought about the significant portion of your living expenses that is tied to the upkeep of your residence? Even when not considering any outstanding debt you might have on your house, having your own place requires a lot of cash flow and chews up a lot of assets. It’s important to realize this when you are working, but it is absolutely critical to understand this when you are planning for retirement.

In order to make it in retirement, you have to live off of any income you have coming in (like pensions or Social Security) plus small portions of your investment assets. Some people can live solely off of their retirement income streams, but most people slowly draw down their investment assets over time to supplement their lifestyle in retirement. The thing is, you don’t want to outlive your investment assets, so you’ve got to have a plan to make your nest egg last. A big part of making your investment assets last in retirement is by reducing your fixed expenses, and as we just discussed, a big part of your fixed expenses is often tied to your humble abode(s).

Whether you are planning for retirement, nearing retirement, or finding that you're eating up your nest egg too fast in retirement, here are some tips that might help:

• Pay off your mortgage(s) before you retire. This will likely reduce your fixed expenses significantly and help you make ends meet in retirement.
• Do major capital improvements to your real estate before you retire. If you’re going to redecorate, finish a basement, or get a new refrigerator, do it while your working cash flow is still coming in. It will make you feel better and give you peace of mind. Think of it as investing in staying put.
• Don’t keep multiple residences if you find it difficult financially or physically. Dusting one house stinks. Dusting two houses is awful! Pick one. Think of all of the property taxes, insurance premiums, utility costs, and lower back pain you will save!
• Get out of town. Sure, stay near the kids, but move to the suburbs or the country. Homes are cheaper, property taxes are lower, and the cost of living is likely lower, too. You’ll feel like you have more purchasing power, and you can add the difference between your urban home selling price and suburban home purchase price to your nest egg to strengthen your overall financial position.
• Consider state taxes on retirees. It’s probably not worth moving states just to save on state taxes, but if you’re on the border or a good portion of your family is in a different state, why not consider it? Take a look at this interactive map, and you’ll see that all states’ taxation is not created equal!
• Finally, think about downsizing. All I’m saying is that if you no longer need five bedrooms, why have five bedrooms? If all of the kids come at once, you can help fund their stays in a nice hotel, and you’ll probably still save money versus maintaining your own five-bedroom “bed and breakfast.” If you do decide to downsize, be careful and make sure you don’t more elegantly furnish a smaller house as opposed to actually downsizing and leaving yourself with some extra proceeds to put with your nest egg.

 

Personally, I plan to have a place on the beach when I retire. If my wife and I can swing it, we’d probably like to keep a place near my parents and her parents and/or near our eventual kids and their families. If we can’t swing it, we’ll just visit a lot because it is often a lot cheaper to pay for a hotel or even rent a place for a few weeks than it is to maintain an extra humble abode!

 

The How to Retire Early Series will continue next time with a look at an important piece of everyone’s retirement puzzle: health insurance.

 

-Tom

Start Strong, Finish Stronger

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Many retirees (or soon-to-be retirees) have a retirement plan based on what is called a “three-legged stool.” They have their pensions (leg 1), their Social Security (leg 2), and their investment assets (leg 3). They worked hard, they went through a lot, and I don’t begrudge them a bit.

If you’re like me and in the early stages of your working marathon that some people like to call a career, it is easy to get caught up in things such as fancy dinners, “flashy” clothes, and expensive gadgets. It’s a lot more fun to think about surround-sound systems, exotic vacations, and big houses than to think about retirement planning. The problem is, I believe our future well-being depends on just that. I believe the three-legged stool is headed to a museum, and younger people, like me, need a new blueprint. I don’t know many people early in their career who are working toward vested pensions, and I’m not willing to make a big bet on Social Security income as we currently know it still being here 20 or 30 years from now. So, if you ask me, the three-legged stool is looking more like a peg leg for us younger folks. Unless you’re willing to walk the plank (yes, that was a pirate pun), it’s important to realize that the ability to retire in the future is probably going to come down to leg 3: investment assets.

 

If it’s going to come down to investments, you’re going to need to get it right. You need to read the fable of “The Tortoise and the Hare” and take “slow and steady” to heart. You need to invest in an appropriate, long-term strategy. You need to make significant progress towards retirement during the first and second decades of your income-earning life, so you can have a decent chance of having significant assets during the last and second-to-last decades of your life.

• Slow and Steady - Saving $100 a month in your bank account, raising your contributions to your employer’s 401(k) or retirement plan by 1%, and opening a Traditional or Roth IRA account that you’re not sure you can fully contribute to can feel almost silly. It seems like a drop in a bucket, and it is, but it’s a drop in your bucket. It’s the first steps on your journey of a thousand conference calls, staff meetings, and expense reports. The hardest part about beginning a savings plan, implementing a family budget, or taking on a debt reduction plan is starting it! Brief sprints of financial progress and long periods or “naps” where you live at your means (or beyond you means) will make you resemble the hare, and you may not win your race. To be honest, you might not even be able to finish! Dedicated, repetitive steps of saving 10% from every paycheck, increasing your retirement plan contributions every time you get a raise, making those annual IRA contributions, and making 13 payments instead of 12 on your mortgage are how you and the tortoise win the race. I think Aesop may have been a financial planner in his free time…
• Invest Appropriately - I keep reading articles about how the market downturn in 2008 and 2009 has really spooked people in their 20s and 30s (millenials). For example, a recent study by UBS found that on average, millenials have half of their assets in cash and less than one third of their portfolios in stocks. I get it, I really do. Our grandparents’ home values went down like lead balloons, our parents’ investment accounts went down like an ACME anvil on Wile E. Coyote, and we couldn’t get jobs even though we went to college and did everything that was asked of us, but we cannot live in fear. My short-term market crystal ball is still in the shop, but I can tell you that plopping all of your assets under your mattress, in a bank account, in a bunch of bonds, or in an annuity with a minimal, yet allegedly “guaranteed,” return is not going to get it done. Young workers need to make diversified, tax-sensitive, and fee-conscious investments, but they also need to act their age! Long-term, 50% cash, 33% bonds, and 17% somewhere else is for grandpa and grandma - not for working millennials who have a longer time frame for their assets to significantly appreciate.
• Make Progress Early - I cannot emphasize how much higher the odds are that you will be in a good financial position if you start planning for retirement now as opposed to six months before you want to retire. Little things like building up an adequate emergency fund so you don’t have to raid your portfolio and sell when markets are down, making the contributions needed to your employer’s retirement plan to get their maximum match, and paying extra towards long-term debts may not seem like much now, but there will be a day when you look back, and you will smile. I wrote about the unbelievable power of compounding earlier this year, but it is worth restating that a dollar saved in your 50s is not the same as a dollar saved in your 30s! Progress towards your retirement goals at any point is great, but the sooner you can start packing away funds towards your future needs, the greater the chance that you will have meaningful compounding in your favor. If you start strong, you’ll have a much greater chance of finishing stronger.

 

The How to Retire Early Series will continue on next week by considering real estate and the pivotal role it can play in retirement planning. I hope you’ll check it out.

 

-Tom

Now or Later

Credit: Stuart Miles

Over the course of your life, a certain amount of money is going to pass through your hands. Obviously you could make this amount be larger or smaller based on how long you decide to work, but regardless, someone should be able to say “X” number of dollars went through your hands after you’re dead and gone. What that means (if you go into a financial vacuum and put investment returns and cash flow strategy on the sidelines) is you are going to have a finite amount of money to spend during your days on this earth. I’m not trying to be morbid, but I am trying to point out that if you are only going to have a finite amount of money, you can choose to spend more now or you can choose to spend more later - you can’t do both. This now or later concept plays a huge role in saving for retirement - especially in saving for early retirement!

In order to retire early, you need to:

• Live within your means - I know I go on and on about this, but it really is one of the keys to long-term financial success. Simply stated, if you want to be in a position to retire early, you need to be make progress almost every two-week pay period, not break even, and certainly not lose ground. You need to spend less than you make and you need to save the surplus, invest the surplus, or pay down debt with the surplus. It’s okay if you don’t make financial progress every once in a while when your spouse has an unplanned surgery, your car has an unplanned blowout, or your very favorite sports team makes an unplanned appearance in the playoffs and you decide to attend, but that must be the exception, not the rule. If you can’t always get the new shoes, go bar hopping every Friday night, or go golfing every weekend with the guys and make financial progress, then don’t! I guess you can get the shoes, bar hop, and golf if you really really want to, but please remember, if you choose now versus later, you are hurting later.
• Annihilate your fixed expenses - Sorry for the strong wording, but sometimes words such as reduce, pay down, or extinguish don’t have quite enough “oomph” to them. Fixed expenses are all around us. They can be phone bills, television plans, HOA fees, gym memberships, minimum credit card payments, car payments, and mortgage payments. If you want to be in a position to retire early, you need to wage war on fixed expenses. Sure, there’s not a lot that can be done about some fixed expenses such as HOA fees and phone bills, but you can try to cut back on some "fixed" expenses like an under-enjoyed cable package or a neglected gym membership (better yet, keep the gym membership and go exercise instead of watching television). As for credit cards, I always say pay them off entirely, live within your means, and don’t abuse them again unless it’s truly an emergency. Consider putting extra principal every month towards any student loans, car loans, or mortgages, so you can pay them off more quickly and reduce your interest expense. Fewer fixed expenses means you will need less income in retirement to support your lifestyle, so you could probably retire sooner and with fewer assets.
• As good things happen, live below your means - With any luck and a decent strategy in place, good things should eventually happen to you financially. Maybe your company will do really well and you’ll get a nice bonus, maybe you’ll receive a surprise check in the mail from your sweet great aunt in Kentucky’s executor, or maybe a bull market will cause your investments to really soar for a few years. When this happens, stick with your strategy and do as my late grandfather often said and “keep on keeping on.” Just because you are making more money or have more assets doesn’t mean you have to act like it! Keep yourself grounded and keep telling yourself that what you are experiencing is financial progress and momentum towards your goal of not having to work. All I’m saying is why get a Mercedes if your Toyota is still doing fine? Why go to the Caribbean when you could have a better time in the Gulf of Mexico? If you want to retire early, I’d keep those champagne tastes in check, and stick with your beer budget!

Next week we’ll continue the How to Retire Early Series by taking a look at why you need to save and invest sooner rather than later and what you should do with those savings and investments so you can start strong and finish even stronger.

-Tom

The How to Retire Early Series

Credit: artur84

I like my job as a financial planner. I really do. I like helping people try to achieve their financial goals, and I love helping people achieve their life goals. It took a while a first, but I’ve even come to enjoy wearing a suit and tie pretty much every single day and trying to look the part.

I also like the beach. I like getting up when I want to and going to bed when I choose. I like not shaving every now and then. I love spending lots of time with my wife, my family, my friends, and my dog. And oh, it would be nice to be able to read for pleasure again, do a little community theatre, and get out my old trombone…

My point is that even though I like what I do for a living, part of me is already looking forward to retirement. Now I’m pretty certain I’ll still be willing to help family, friends, and my favorite clients under the right circumstances even after I’ve turned the light off in my office for the final time, but I’m also pretty sure that my job puts enough pressure on me to make me not want to work as hard as I do if, financially, I didn’t have to.

Many people my age seem to feel the same way, and with that in mind, I think it is high time for me to write a series on what you need to do to retire early. Over the next several weeks, I’ll discuss how reaching financial independence really is now versus later and why it is absolutely critical for you to start strong so you can finish even stronger. I want to cover how important real estate and health insurance are to retirement planning. I will also give you some retirement cash flow strategies to consider, and even explore why you might not want to retire early after all, even if you could!

If you’re already shaking your head and wondering why someone my age might already have the audacity to be thinking about retirement, let me offer the simple response that you can’t blame us! My generation has seen our parents and grandparents laid off or forced out at the end of their careers, we’ve seen pensions reduced and “guaranteed” benefits cut, and we’re uncomfortable relying totally on Social Security. To the people roughly my age, I’d offer that if we’re going to have a chance of financially making it in retirement, we need to act now - not 20 or 30 years from now!

I hope you’ll join me on this exciting journey and consider my thoughts and suggestions throughout this series. Please spread the word to your family, friends, and anyone planning for retirement or already in retirement who you think could benefit. Thank you!

-Tom