By Brian Jester
I’m paraphrasing the the current TIAA-CREF ad campaign but the concept is the same, we frequently run out of daily necessities (milk, batteries for our cameras and mobile phones), but we should never run out of lifetime retirement income.
Are we saving?*
According to Eric Reed’s article, “What Is The Average Retirement Savings in 2019?”,1 in 5 Americans are not saving for retirement, and 1 in 6 baby-boomers either approaching, or now at retirement age, have no savings. For millenials the statistic is even more jaw dropping: 6 in 10 have no retirement savings whatsoever. So… how not to become a statistic? Read further, I promise it’ll get a whole lot better!
How do you feel about a 4% raise? (Employer Matching)
Let’s say your employer has a 401K retirement savings plan, and participates in employer matching on the first 4%. So if you were to save 4% of your income, your company, kicks in the matching 4%, effectively doubling your money, and that my friends is a 4% raise!
Pay Yourself First (Get Rich Slowly)
I work hard, I want to enjoy my life now, and I don’t have cash at the end of the month to put into retirement. Sound familiar? By contributing to your 401K plan directly from your paycheck, you avoid the pitfalls of paying all the bills first, and then prioritizing your retirement savings afterwards. To pay yourself first, is to take care of your future self by saving constantly with each paycheck, letting your fortune gradually build during your working years. But how much to save? At least what you’re employer will match, but if you can swing it, let’s go for 10% or more.
Dollar Cost Averaging (Buy Low, Sell High?)
Wait, if I’m going to own stocks, bonds, funds, etc., shouldn’t I buy low and sell high? In a perfect world, yes, however, since there are daily, weekly, monthly & yearly ups and downs, trying to find those inflection points is called timing the market and even the best stock brokers and fund managers fail to get this right. What can you do to reduce that risk? Spread your purchases out over time, it’s called dollar cost averaging, and by regularly contributions in your 401K, you’ll be buying when prices are low and high, effectively getting a happy medium (average), and no worries about timing the market.
Low Fee Index Funds
Stocks are risky right? Where should I park my cash? One of the best ways to reduce risk to individual stock price volatility is to purchase a fund (mutual fund/Exchange Traded Fund) that invests in the whole market or a portion of the market. Index funds do just this; they track a known index (NASDAQ 100, S&P 500, Wilshire 5000) so instead of a fund manager picking and choosing stocks, the fund is on auto-pilot, meaning management fees are ultra low, and you reduce dependency of a manager to “time the market” and pick winners, as the index fund is already tracking “winners”.
Rule of 72 (Compound interest is the eighth wonder of the world*)
Wondering how soon you’ll double your money? Using this rule of thumb (and the power of compound interest), if you divide 72 by the annual interest rate, you’ll come up with the time to double your money. Here’s an example using the S&P 500’s historical average return rate of 10%:
72 / 10 = 7.2 years
You’re telling me this because?
Let’s say by the age of 40 you and your spouse have saved $250K, at a 10% rate of annual return, by the age of 47, you’ll have accrued ½ Million dollars, by the age of 54 you’ll be millionaires and by 61 you’ll be multi-millionaires. Sounding better?
* Albert Einstein
Drowning in Information, Starving for Knowledge*
So many choices, where to start? Here’s some next steps to get you started:
- Enroll in your employer 401K plan
- Get the employer match (I recommend saving at least 10% to start)
- Pay yourself first
- Choose a low fee index fund
- Periodically check on your progress
* Quote from Michael McAllister, principal at William Mercer