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!

I work with people every day, guiding them to retirement.  I am always impressed by my clients who are the ‘millionaire next door’; those who have diligently saved and amassed their fortune quietly- and you would never expect them to be millionaires.  They have successfully saved for retirement by living within their means, and put away money consistently over their entire career. 

Yesterday’s generation had pensions.  Today, some of the baby boomers have pensions; some boomers have 401(k)’s, a few even have both.  Add social security into the equation and retirees can generally live comfortably. 

Generation-Y is in some serious trouble, however.  I’m 31 years old (Gen-X border), and it seems like everyone in my generation Read more…

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.