Getting ready for retirement should be the easiest thing there is. After all, you have about 45 to 50 years to get ready. Yet there is something about a goal that is both big and far in the future that makes people not plan and not act until it is maybe too late. To be ready for retirement today and generate an income of about $50,000 per year, you’ll need something like $1.3 to $1.5 M. To be safe, I’d want at least $2 M. That’s an awful lot of money. For those starting today, the numbers will be probably $2.5 to $3 M for the same standard-of-living. Yet if you’re working a job at 16 and put away just $1,000 into an IRA invested in a total market mutual fund, you’ll have about $500,000 at retirement age assuming you don’t touch the money between now and then. Put away $6,000 into an IRA between ages 16 and 18, working summer jobs, and your retirement will be all but guaranteed. Put another $10,000 away before age 25 and you’ll have the money to live a very nice life in retirement. Easy.
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But people don’t do this. They spend all of their money from jobs as teenagers on a car to get them to work which is rusted away and gone before they are 20. In their twenties they blow their money on time shares, vacations, eating out, drinking at bars, lattes, and a bigger house than they can afford and before they know it, they’re 45 and have not started funding their 401k yet. This is particularly bad given that they could have gotten tens of thousands of dollars extra from their employers if they had just contributed to the 401k plan since it typically comes with a match. If they did start a 401k, they probably cashed it out each time they changed jobs, paying out 35% of the money to taxes and penalties, so that they started over again each five to ten years.
The numbers also seem daunting. Imagine saving up $3 M over a career. Even if you average $150,000 per year, you’d still need to be putting away more than a third of your income – about $65,000 per year – to reach $3 M by simple saving. That’s a lot of self-denial, especially given that $150,000 will feel a lot like $75,000 by the time you near retirement age. And there are all of those costs like insurance, mortgage payments, student loan payments, college costs for your children, and car payments from new cars every few years. Many people just decide to “live for today” and worry about saving tomorrow. The trouble is, hitting retirement without a savings will probably not work out well. Continuing to work until you die isn’t always an option either since sometimes you get sick or you get laid off and no one wants to hire a 65 year-old who expects a high salary. Don’t let that be you.
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Get on the path to a retirement sitting by the pool with your home paid-off and maybe a vacation home on the beach or in the mountains. Be able to travel through your golden years to see the world or see family. Be able to go out to nice dinners and stay at the nice hotels. And be the guy or gal at church that always makes the secret donations when something needs to be fixed or built. Here’s how:
- Pick a career that provides a decent income. Find something that people need, not just something you think is fun. If you can find something that is both, good for you.
- Start putting away money for retirement early. The sooner you start, the more time your savings has to grow, which means you’ll have more money to enjoy later in your career. Put away 10-15% of your income from age 20-40 and you can slack off in time to pay for your children’s college bills or just expand your lifestyle in your forties or fifties. Start in your teens and you’ll really get to enjoy the power of compounding since contributions at age 16 will double an extra time compared to contributions at age 22. That means $250,000 turns into $500,000!
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3. Leave the money in your retirement plans alone. Pulling your money out of your 401k, or giving yourself a loan from your retirement plan, if the surest way to really mess up your retirement. Leave things alone. Save money elsewhere so you’ll have cash for things like starting a business in your fifties or upgrading your kitchen.
4. Diversify, but concentrate in common stocks. Stocks will provide the greatest return over long periods of time, so you’ll want to have mainly stocks until you are within about five years of retirement. Spread this out to different segments of the markets since different sectors do well at different times. Plus, don’t forget about a modest international holding.
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Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.
