Category Archives: Retirement

Retirement Rich But Life Poor?

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I’ve been thinking about my financial strategy for the present and future. Not having anybody to ask about my investment strategy, I have to rely on myself to see what needs done (this is part of the reason I blog, to help others through my experiences). I now realize that I’m on a path to live Retirement Rich but Life Poor.  I want to tweak my investment strategy a bit so that I’m on my way to have a better life by focusing on the present instead of trying to be Retirement Rich.  You don’t hear many people write about saving too much for retirement, but that’s exactly what I’m currently doing!  Here are my financial strategies and thoughts:

My Current Financial Strategy

At the beginning of the year, I noticed that I had more deductions from my paycheck than I received in disposable income versus last year’s paycheck. So “taxes+401k contributions+health insurance+other” was greater than what I had left to spend. So if I made 50k, 26k goes to deductions from my paycheck, while I only receive 24k to live on and invest.

I probably spent at least a good hour or two thinking something must be wrong, but after a few months of getting less than 50% of my gross paycheck, and continually doing the math, I’ve come to the conclusion that my paycheck is correct.  I knew that I was putting a lot into retirement and other things, but geez…

Let me list out the deductions that are killing my paycheck?

  1. Taxes, no mystery here…
  2. 401(k) contributions – This year I’m maxing out the amount that I’m allowed to take out.  In fact, I’m overshooting the max amount by $500 because I know that my employer will stop my contributions once I hit that maximum.
  3. Roth IRA – This year I’m maxing out this amount too.  Previously, I’ve been doing experiments with this account and actually did great.  Read my article called “My Roth IRA Has An Annual Growth Rate of 52.75 % Since Inception” if you are curious, or perhaps the title is enough!
  4. 529 Contributions – I contribute over 4,000 a year to 529 plans, this takes a respectable bite out of my paycheck too.
  5. HSA Contributions – It seems those of us with jobs are all supporting ourselves now after the Affordable Care Act. Maybe net good, but individually painful?
  6. ESPP Program – This is my shinning deduction that actually increases the amount I gain each year by $2,000!  I wish I had more deductions like this one!  Still is puts a monthly strain on me all the same.  If your employer has an ESPP, and you don’t know if you should participate, read my article called “Getting Over 15% Return By Saving Money In An ESPP“.  I highly recommend participating in an ESPP if you have the opportunity!

Okay, I haven’t even got to the meat of this post yet, but I feel obligated to present some of the “Life Poor” elements of my finances.

A Look At Retirement Saving

Because I’m spending at a subnormal level for the amount that I get paid, this allows me to max out my retirement contributions.  After all, that’s what everybody says is the “Smart” way right?  I use to believe that too, but now I’m not too sure, here’s why.

  1. I’ve read too many stories about people who were too frugal and until they died, they lived like a hermit hardly ever leaving their house.  I’ve even read that some would eat out of their neighbors’ garbage cans.  Yeah, they had millions when they died, but I don’t want to live that way to get there.
  2. Let’s face it, when you are old, you aren’t going to go clubbing or to concerts or be active in sports or really do much of anything that involves moving fast or getting very excited.  Why be rich with nothing to do?
  3. Someday in the future, the government may decide that such retirement accounts are easy targets to raid and steal from.  One never knows…  Some say look at Social Security and Medicare and the state that those programs are in.
  4. Death and Accidents happen.  You could be saving like a fiend in your retirement account, then some freak accident happens and you are dead.  Or you get some incurable cancer, or some injury severely affects your mobility so that you are trapped in a wheelchair (Christopher Reeves for instance).
  5. You might get scammed and lose it all.  Don’t believe me, ask any Bernie Madoff victim or Worldcom investor.

So what should I (we) do?  Maybe go to a fortune-teller?  No, instead create a balanced financial strategy that involves getting money to present investments and at the same time into retirement accounts too.  The Roth IRA is a good in-between vehicle because you can withdraw your contributions at any time.  It’s just the earnings that you can’t touch.

So in my particular case, next year I’m going to drop my contributions percentage down to 10% for my 401(k), but still, max out my Roth IRA.  Then with the remaining money, I’m going to invest in my regular brokerage account, looking for some golden dividend stocks.  By golden, I mean ones that have the potential to keep growing while still yielding a dividend (maybe Apple by then?).

I’ll have more thoughts on this later…

Don

Underestimating Your Returns

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When you are estimating your future value of investments, what kind of return do you plan for? Do you aim high, hoping that the optimism will somehow lift the rate of return on your investments?  Or do you try to find the market average and stick to that?  What if I told you that it is better to aim low and underestimate your returns on your investments?

401k History

401k Performance History

Why Your Expected Returns Matters

Even though I am still getting the hang of investing, I have done considerably more than most of my peers.  I am starting to speculate about my retirement age and have been forced to ask myself this same question.  I think this is an important question to ask because how I answer it will affect my finances.  Here’s why I think it matters.

If I estimate a high return, I can make one of two logical decisions:

  1. get really excited about my potential investments and invest more money.
  2. think that I will have enough money for retirement and fulfill my need to splurge a little (or a lot) on things I don’t necessarily need.

While a person’s response to their expectation may vary from person to person, it should be clear that regardless of the response, your expected return affects how you approach your finances and therefore important to consider carefully.

Why I Choose to Underestimate My Returns

When I realized why this question was important, I realized that I didn’t want to lean towards over-estimating my returns.  I think this can be a dangerous position to put yourself in.  You may over-anticipate a return and even if you go the route of investing more money, you could run the risk of investing too much money in something that won’t perform well at all.  This could put me and my family in a difficult position later in life and I don’t want to do that.

So, the question then goes to whether I want to go with the market average, or under-estimate my returns.  At first glance, the market average would seem to offer you the best route, right?  It would be the most accurate thing to gauge your expected return on your investment and therefore make you better informed for how much you need to invest.  There will be ups and downs, but sure the average is the best route to go, right?

Because I don’t choose individual stocks, I know that it will perform with the market average or close to it.  Yet, I choose to plan my retirement according to conservative figures for two reasons.  Underestimating my return leads me to invest more money.  While I could plan my retirement and figure how much I should invest each month/year on the market average, I choose to use a lower % in order to give myself some cushion.  I am a person that likes to play it safe.  The adage, “Better safe than sorry” echoes in my mind as I type this.  The second reason that I underestimate my earnings is because of the potential to win big.  If I plan on a modest 5-6% throughout my working years and end up making an average 8-9%, it will seem like I won the lottery when I go to retire.  A difference of a few percentage points could make a difference of hundreds of thousands of dollars over 30-40 years.

Overall, underestimating my returns forces me to be more frugal, invest more now, be prepared for a low return.  I would much rather be more aggressive in the amount that I am investing now and have financial security later, than to be forced to go back to work when I am 70+.

What kind of return do you plan for?

This was a guest post by Wayne at Young Family Finance. He writes about the every day financial challenges that young families face, like the cost of owning a dog or figuring out an appropriate tip.

Losing Free Money By Not Participating in a 401k Plan

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I once had this friend (let’s call her Daphne) that was a brilliant, vibrant account executive at a large financial company.

I was always impressed by this individual, both with her energy and how fast she processed information.  One day we met up for lunch and discussed stock market investing strategies.  I was shocked to hear that while Daphne had a regular brokerage account and did some trading, she didn’t participate in her employer’s 401k Plan.  To me, her not being in a 401k was analogous to a dolphin that doesn’t like to get wet!  I was amazed!

Assuming that her employer’s 401(k) plan was horrible with no match, I commented something along the lines of “your employer’s 401k suck, huh”.  Daphne then told me no, in fact she said it was quite generous.  Obviously now I was curious, so I asked about the details of her 401k plan.  She said that they matched 200% on the first 1% of the participating employee’s salary, then 100% the next 4% of the employee’s salary.  Such a plan is very respectable!

Actually it was the first time I had heard of a 200% match, that was pretty amazing in my book.  so I asked her if she contributed at least 1% of her employer’s 401k plan.  She said “no”.  No? I said incredulously.  “No”, she said again.  Now I think it’s crazy to pass up 100% match on money, but to pass up a 200% match just seems stupid?

So I asked “Why”, in a voice that was a bit too high-pitched (think of when you hear people say “Really” in such a tone).

She explained to me about how she was divorced and money was tight, then she said that all her relatives have died early and she expect to go out the same way.  When I heard this, I thought “But you have 2 kids?”.  Just being a friend though, I had to nod my head acknowledging that it sounds tough.  But then I said, perhaps she could do the 1% then do a hardship withdrawal, but she said the paperwork wouldn’t be worth it.  And I understand her point, so we parted ways after a great lunch.

 

1 Year Later…

About 1 year later, we were at lunch again, celebrating that she got a promotion (a 50% increase in pay, very impressive) at work.  After an entertaining and fun lunch, I asked if she decided to open a 401k now that she has a lot more money.  Surprisingly, she said NO.  I was at a loss for words.  How could a person that is physically beautiful and mentally gifted not see the value in contributing to such a generous 401k plan?

This was the first time I began to believe that even smart people make bad financial moves sometimes.  My friend has since move to a different state (her employer is very large) and I’m bad at keeping touch.  I wish her well, and hope that she finally broke down and decided to participate in a 401k plan…

What do you think of my friend?  Do you think that she is afraid that she will jinx herself by opening a 401k plan?  Perhaps she believe that if she does, she will die earlier since her family dies early…

Why would an otherwise brilliant person not take advantage of free money?

Bests,

MR

The DOs and DON’Ts of Retirement Plans After a Layoff

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The dos and don’ts of retirement plans after a lay off

Since the economic downturn, more and more people have found themselves being laid off from work. But, if you were part of a retirement plan with your employer, for instance a 401(k), then what should you do with it if you are laid-off from your job?

Coming up are some of the dos and don’ts to help you decide the best course of action should you find yourself in this predicament.

DO…ask for help.

Company layoffs are a very complicated area and there are a variety of circumstances that can affect your severance package, including the size of the payoff you receive and what happens to your employer-offered benefits.

That is why it is a good idea to seek professional financial and legal advice if you find that you are being laid off. Be sure to pick a representative that has a good grasp of company and employment law and can go through your employment contract and enter into a dialogue with your employer about the details of your severance package, including things such as payment of unused holidays and the matched payment into your 401(k).

 

DON’T…rush into any decisions.

The stress of being laid off can make it easy to rush into decisions regarding your severance package as you don’t want to drag out any dealings with the company that is laying you off.

However, there are some very important financial decisions to be made that will have a direct impact on your future so you should take your time and seek advice on the best way to manage your benefits.

And don’t let your (former) employer hurry you along as if you have over $5,000 in your 401(k) you  can leave your (former) employer to sit on it until you are 65.

In the meantime you can determine whether to just leave the current plan running or open a new account, such as an IRA.

Again, it may be a good idea to seek professional financial advice at this point in order to ascertain what your best course of action is.

 

DO…be aware of your rights.

As mentioned earlier, company layoffs are a very complicated area and certain benefits are protected by law. For instance, if you are under the age of 59½ and you have been retired then you may be eligible for a 72T distribution which will enable you to access some of your 401(k) without paying the 10 per cent penalty fee.

Another instance whereby your 401(k) is protected is if you lost your job through a company-wide downsizing in which at least 20 per cent of employees were laid off. If this is the case then you are considered to be fully vested as you are part of a ‘partial termination’ of the 401(k).

As before, it is a good idea to seek professional advice on your rights.

 

DON’T…cash it in.

When you lose your job your whole world is turned on its head as you are facing the very real prospect of not being able to meet the demands of your personal finances. And because so many people are worried about how they will meet the repayments on mortgages, loans or credit cards when they are out of work, they cash in their 401(k) to give themselves some breathing space and meet the urgent bills.

However, when you cash in your 401(k) you leave yourself open to taxes and penalty fees and you also lose any cumulative savings benefits.

Once again, it is worth seeking professional advice at this point to work out the best way to grow your savings.

This article was provided by Andreas Nicolaides, a personal finance author at UK-based MoneySupermarket.com.

Thanks,

MR