Investment Guy

The first Ask the Investment Guy submission- and it’s from a real person!

Investment Guy, I know that starting a 401K or 403B or IRA is beneficial, but I currently live paycheck to paycheck. I’m 34- how can I make this happen? – Kevin

Hi Kevin- Thanks for asking! That’s a great question. Living paycheck to paycheck certainly makes this goal seem intimidating, but it’s attainable with a little bit of effort. Recognizing the need to save for retirement is an awesome first step. In order to save for retirement while your cash flow is tight requires commitment and sacrifice; once you are committed, read on.

Where is your money is currently going?

If you haven’t already created a budget, do so.  It’s an interesting exercise that will show you exactly where your dollars are going each month, and maybe you can find some wasted expenses to redirect towards saving. I’m not going to suggest you cut your diet down to ramen noodles, but maybe brown bagging your lunch every day is an opportunity to save a few bucks. It’s little things that go a long way. (here are 2 budget templates: one is for families , another if you are single)

How much to contribute:

Anything is much more than nothing- and it doesn’t have to be a lot. Can you afford $20/week?  Contributing $20/week with market growth of 5% over the next 30 years will total more than $66,000! Additionally, at the end of the year you will see an account statement with a bottom line number representing your progress. If you want to really improve your odds at a successful retirement, each year you should try to increase your contributions by a few dollars.

Make automatic contributions

Set up contributions to occur automatically straight from your paycheck or checking account. This keeps the money out of your hands and instills the discipline of consistency.

Behold of the power of tax deduction…

If you contribute $20 to a 401k, this money goes into your account before taxes are taken out.  Therefore, assuming a 20% tax bracket, your take home pay only goes down $16 and you saved $20 in your 401k for an additional $4 to you each week.

… and tax deferral

Inside of your retirement account the IRS allows you a free pass from paying taxes on gains that are owed in non-retirement accounts. In exchange for these tax benefits, you are waiving access to these dollars until you are 59 ½ at the earliest. These may seem small, but over time are powerful. It’s also one of the very few ways to legally avoid paying taxes.

Finally, if it’s simply not possible to find the extra money in your current budget, maybe you can try these 2 harder approaches: ask your employer for a raise of $20/week (ya never know) or find a second job for a couple of hours a week. If you ask me, it’s better to bust your hump while you’re in your 30’s instead of working into your 80’s.

Good luck Kevin!

Lump Sum

$1.92 million (pre-tax) is required today to fund a payment stream of $100,000 annually for 30 years.  This assumes 2.5% inflation and a 6% rate of return annually.

1% Change in Rate of Return (RoR):

-1% :    A 5% RoR increases your lump sum need by 13% to $2.16 million.

+1%:   A 7% RoR decreases your lump sum need by 10% to $1.72 million.

Are you wondering what your lump sum number is?  Is your nest egg big enough?  Will you outlive your money?

We’d be happy to do the math for you.  All you have to do is provide the following variables, and we will do the rest:

«     Your current age, your spouse’s current age

«     Your expected date of retirement

«     Your annual income need in retirement

«     Your existing streams of income

• Your social security  benefit
• Your spouses social security benefit
• Pensions / Annuities / etc.

«     We will use Inflation assumptions of 2.5% (unless requested otherwise)

«     We will assume market returns of 6% (unless requested otherwise)

«     We will use a life expectancy of 95 (unless requested otherwise)

Click here to submit your request

P.S. Here are some helpful hints:

If you don’t know your monthly need, click here for a budget template.

Want to find out your Social Security benefit?  Click here.

How do you plan for retirement with so many unknown variables that can change from year to year?  It’s not as simple as calculating your assets on the day you retire and estimating how much you can spend per year.  How much can you grow your nest egg?  How many different income streams do you have?  How long will it last?  What if the markets go down?  There are many different risks out there to consider.  Here are the five risks that have the most influence on the success of your retirement.  The key to a successful retirement is making sure you will not outlive your money.

1. Longevity Many people underestimate their life span and risk outliving their assets.  What is realistic?  What is the worst case scenario?
2. Health Care Expenses  Rising health care costs coupled with inadequate health care coverage can have a devastating impact on a retirement income plan.
3. Inflation Inflation increases the future costs of goods and services and may erode the value of assets set aside to meet those costs.
4. Asset Allocation Retirees with a portfolio overly concentrated positions investments expose themselves to a greater risk of outliving their assets.  It is possible to be over-concentrated in conservative or risky investments.
5. Withdrawal Rate Aggressive withdrawal rates increase the possibilities of outliving your assets.  Are you drawing down your account at a sustainable rate?

If you are concerned about outliving your assets, you need to review your portfolio.  Don’t just sit back and hope things will be ok.  Review your retirement income strategy.  Determine whether it is consistent with your current goals. Is your withdrawal rate sustainable?   Address your insurance needs.  Revise your plan, or create a new plan, that addresses your concerns for the future.

We don’t invest only to make money. We invest to accomplish goals. Goals such as retirement, paying for college, leaving your children at least $1million, leaving a bequest to charity. Specific, easy to measure goals.

People often think there is a certain amount of money that a 40, 50, or 60 year old should have set aside in order to retire.   How much?

It’s an interesting question. The answer, much like everything that has to do with investing, will be different for everyone. Mostly it will depend on your lifestyle and your spending habits.

We typically find that the answer to this question is determined by working backwards. Start by determining your NEEDS.   What is the bare minimum of income you absolutely need every month to get by?   Hopefully you have a written budget by now; if not add up your mortgage, health insurance, utilities, etc- all of the necessities of life.  Think about your annual expenses, long term care premium, real estate taxes.  Figure out exactly what you need on an annual basis, and find a way to generate that from your investments using fixed income investments. If you can achieve this using guaranteed investments, that will be your best place to start. 

Once you have satisfied your needs, then you should think about your WANTS.  Things like vacations, hobbies, and luxury purchases.  You can figure this number into the equation. 

If possible, you should account for the UNKNOWN, such as accidents or inflation.  Living on a fixed income is a beautiful thing, until unexpected expenses, like a new roof, force you to dip into principle.  If you have less principle, you will earn less interest and hence, you will have less income.  Also, be sure to consider the eroding effect that inflation can have on your income. 

Another good rule of thumb is to keep 3 months of needs in a emergency fund of cash, no matter what stage of life you are in.

Priority #1 is to make sure you can satisfy your needs. Otherwise you’ll be back to work in no time.