Saving for retirement

[divits]

Thanks to Ox for starting this forum. I have no idea if there will be very much interest or not but I thought it couldn't hurt to try.

I'm sure there are a lot of people posting on these forums who have expertise in finance, real estate, banking, investing, and business that can share some of their experience/knowledge with others who might benefit. I specially think that this forum could be a great tool or reference for younger Gators just getting started in their careers and professional life. They can learn from other's mistakes and successes and use those experiences to help steer their path toward a more successful financial future.

So, in that regard, I'm going to start out with a topic that may seem like a no brainer and quite basic to many here but seems to be something difficult for the majority of Americans....saving for retirement.

I'm not going to bore with statistics but its safe to say that the majority of Americans are not saving enough or ANYTHING for retirement. If there is one thing that people in their 20's need to have beat into them it's the power of compounding interest. It's one of the most wonderful and magical things in the world. And it's available to everyone. But it's also fleeting and its power both increases (for those who use it) and decreases (for those who don't) every passing day. You can't get it back so you have to take advantage of it as early as possible.

To give you idea of the power of compounding interest, (i.e. letting your money make you money), I'm going to show how someone making the US median income of $59,000/year can become a millionaire with only a very minimal knowledge of finance and investing.

Let's say you're a 25 year old just starting your career out of college. Many won't start at $59K/yr but for argument's sake let's say you do and don't ever get a raise for the next 40 years until you retire at 65. This is highly unlikely but you will see how it will prove my point and then some. So you decide to invest 10% of your income every paycheck in your 401K or IRA. This would work out to around $500/month. Something also to remember is that if this is a 401K then that $500 is PRE tax dollars, meaning it comes out of your paycheck first and then you are taxed on the remaining amount. So if you are having let's say 15% of your pay going to withholding tax then that $500 you don't have to spend every month because its going into your 401K is really only $425/mo because $75 ($500 x 15%) would have had to go to taxes anyway. Whew! Ok, bear with me. I know this is pretty elementary to some but it's intended for beginners.

So now you're saving $500/mo, how do you get to a $1,000,000 or more? It's pretty easy and not really complicated at all. One of the best tried and true methods is to invest in the stock market which has been pretty consistent with returns over the long haul with some occasional severe fluctuations. But you're investing for 40 years and won't be needing the money until you're 65 so you can ride out those fluctuations. On average, the overall stock market has returned around 7% since 1950. To invest in "the stock market" overall one of the best vehicles is a Total Stock Market ETF. It's basically a fund that mimics the entire stock market and is tradable like a stock. Because there is no real management needed of the fund the management fees are usually much lower than even a mutual fund. Like around 0.04%.

So now you're saving and have picked a vehicle. What's next? Nothing. That's your plan in a nutshell. Just stick to the plan and you will be a millionaire eventually. How? Well let's use a simple savings calculator.

Simple Savings Calculator - Savings Interest & Investment Growth

So, if you start with $500 and put in $500 a month for 40 years and earn an average of 6% (I'm being conservative based on the 7% the stock market has earned historically) you will retire with $1,001,224.09. And this number does not include any 401K matching your company or companies may contribute.

Of course many bad things can happen over 40 years. People lose jobs, illness etc.. But on the flip side, many good things can happen over that time period too that can make your final number much, much bigger.

There are literally thousands of different ideas on how to invest and make money. I thought I'd start off with something very basic. I'm looking forward to hearing from others about lots of other ways to make money and become more financially astute.

 

[Pablos Tunnel]

Save at least 30% of your income on a sytematic basis. Invest in different asset classes. Equities, insurance, real estate and alternatives. Invest in qualified and non-qualified accounts. Do not chase returns. Focus on building wealth. Only use debt to build assets. Understand how fees, carrying costs and taxes can be a killer so minimize as much as possible. But mostly save a lot and start early. Its not the rate of return but rather the rate of savings that matters most.

 

[deuce]

I'm not very good at saving money but I am good at buying under market real estate. Consequently I'm property poor.

I'd recommend regular saving for most people.

 

[ExecutiveGator]

Save at least 30% of your income on a sytematic basis. Invest in different asset classes. Equities, insurance, real estate and alternatives. Invest in qualified and non-qualified accounts. Do not chase returns. Focus on building wealth. Only use debt to build assets. Understand how fees, carrying costs and taxes can be a killer so minimize as much as possible. But mostly save a lot and start early. Its not the rate of return but rather the rate of savings that matters most.

What do you mean by using debt to build assets? Take out loans to purchase items (houses, land, cars, etc.) and slowly pay back? Better to keep your cash and pay low interest fees?

And, thanks to all. I love this forum already - I’m an engineer who wants to retire some day, and I just don’t have time right now to learn all the tricks besides investing as much as you can as quickly as possible.

 

[williston_gator]

My company recently got bought out. It switched us from Fidelity to Vanguard for our 401ks. Not sure wtf Fidelity was doing but it jumped $4k since the switch in January.

 

[divits]

My company recently got bought out. It switched us from Fidelity to Vanguard for our 401ks. Not sure wtf Fidelity was doing but it jumped $4k since the switch in January.

Couple things. Vanguard has one of if not THE lowest cost managerial fees in the business. Those fees can add up and eat into your returns in the long run. Just think of all the compounding interest you can lose if you are paying 1% management fees over decades. But the main reason for your increase is that the stock market took a dumper at the end of last year and has made a pretty solid recovery this YTD.

 

[Pablos Tunnel]

What do you mean by using debt to build assets? Take out loans to purchase items (houses, land, cars, etc.) and slowly pay back? Better to keep your cash and pay low interest fees?

And, thanks to all. I love this forum already - I’m an engineer who wants to retire some day, and I just don’t have time right now to learn all the tricks besides investing as much as you can as quickly as possible.

Make the time! Its your money and NOBODY else is going to be a better caretaker. If you need a coach then seek the guidance of a good advisor, one that is a fiduciary.

 

[Pablos Tunnel]

Furthermore, for those of you with corporate qualified plans (Simple, 401-k, 403-b, 457 ect) please make sure you are contributing whatever level that is needed to capture your employers full match. If you do not know then speak with HR or the plan administrator and ask. Never leave free money on the table.

 

[bradgator2]

I wish I would have had more knowledge about investing when I entered the workforce. I vowed to not let my kids make the same mistake. So, I have made them save 20% of whatever money they come across. Birthdays, Christmas, etc. I opened a custodial Scottrade, now TDAmeritrade, account and make them put it in the market.

I started them with VTI, which is Vanguard's Total Market Index. It has a razor thin 0.04% expense. This ETF has done very very well for them.
Vanguard ETF Profile | Vanguard

I now let them pick their own stocks. I help them research them, but it is their decision. I, naturally, will cover any trading fee and usually slip in another 20 bucks or something.

Now my oldest basically thinks this is robbery on my part and she pretty much hates doing this. My youngest is on board 100% and has 4x times the amount of money in her account.

The interesting part to me is their reaction to the market. My oldest basically dumped everything into Microsoft, which has damn near tripled in price for her. So, she thinks everything should triple in price.

My youngest is all about the dividends. She loves seeing a couple of "free" bucks deposited into her account every month. Also, she has gone full war mode and pretty much only researches defense stocks lately.

 

[Pablos Tunnel]

Executive
“What do you mean by using debt to build assets? Take out loans to purchase items (houses, land, cars, etc.) and slowly pay back? Better to keep your cash and pay low interest fees? “

If I borrow $500k at 3% to purchase an asset that is returning net 9% I have just used the bank’s money to build my wealth.

 

[g8r.tom]

I wish I would have had more knowledge about investing when I entered the workforce. I vowed to not let my kids make the same mistake. So, I have made them save 20% of whatever money they come across. Birthdays, Christmas, etc. I opened at a custodial Scottrade, now TDAmeritrade, account and make them put it in the market.

I started them with VTI, which is Vanguard's Total Market Index. It has a razor thin 0.04% expense. This ETF has done very very well for them.
Vanguard ETF Profile | Vanguard

I now let them pick their own stocks. I help them research them, but it is their decision. I, naturally, will cover any trading fee and usually slip in another 20 bucks or something.

Now my oldest basically thinks this is robbery on my part and she pretty much hates doing this. My youngest is on board 100% and has 4x times the amount of money in her account.

The interesting part to me is their reaction to the market. My oldest basically dumped everything into Microsoft, which has damn near tripled in price for her. So, she thinks everything should triple in price.

My youngest is all about the dividends. She loves seeing a couple of "free" bucks deposited into her account every month. Also, she has gone full war mode and pretty much only researches defense stocks lately.

Robbery?

 

[bradgator2]

Robbery?

Yeah man, she HATES it. For her, I think I would honestly do her more good by making her save that 20% and stuffing it into a shoebox so she actually see it, roll in it, smell it.

 

[TheDouglas78]

My company recently got bought out. It switched us from Fidelity to Vanguard for our 401ks. Not sure wtf Fidelity was doing but it jumped $4k since the switch in January.

We have been rolling with Fidelity the last few years as well, and the difference in my 401k that isn't from contributions is been leaps and bounds better.

 

[Zambo]

For the love of all that is holy, if your company offers matching funds for 401k contributions, do whatever you need to max out these matching funds. It’s FREE MONEY!

If you’re young and in a lower tax bracket consider a Roth IRA or 401k. They tax your money at your current low rate before it goes in, but when you draw it out later it’s tax free, even if you’re in a much higher tax bracket. It might not be worth it if you are already in a high bracket and plan to be in a lower bracket after you retire and downsize. In any event only funds you personally put into your account qualify for the Roth option...any company matching funds will not be Roth funds.

No matter how much money you make there is a limit to how much you can sock away into a retirement account to save on taxes. It’s roughly 18k per year for your own contribution, and 54k total per year for company matching contributions combined with your own. After age 50 they increase the allowable amount by $6k for a total of 60k per year. These limit amounts go up a little bit roughly every other year.

If you’re a young ‘un you might think those limits are way beyond your means but if you have a degree from UF chances are you’ll get a good job and receive enough compensation that by the time you are in your 40s or 50s you’ll have plenty of opportunity to save this much. The more you save and the earlier you save the sooner you can retire. Who wants to work until they die?

Almost everybody that works with a company has access to a 401k and the ability to automatically contribute to it every payday. Trust me on this, if you haven’t done so already go set it up today. You will never miss the money. Until you want to retire and it’s not there.

 

[bradgator2]

Yeah, I've always loved the Roth. I actually consider our Roth to be our true emergency fund because you can always pull out your contributions at any time with no penalty or tax (since it is post tax dollars). Currently, if you are married, you can contribute $6000 per person, per year.... if you make less than $193,000 of MAGI.

 

[Zambo]

Yeah, I've always loved the Roth. I actually consider our Roth to be our true emergency fund because you can always pull out your contributions at any time with no penalty or tax (since it is post tax dollars). Currently, if you are married, you can contribute $6000 per person, per year.... if you make less than $193,000 of MAGI.

Those rules are for an IRA. If you have a Roth 401k option you can contribute much more and without an income limit.

 

[bradgator2]

Those rules are for an IRA. If you have a Roth 401k option you can contribute much more and without an income limit.

Good point. Thanks.

 

[no1g8r]

Its not the rate of return but rather the rate of savings that matters most.

Most of what you have written makes sense, but when I read this and thought about the difference between someone sticking their savings in a 2% account (which has been under 1% for the past several years), versus putting their savings into other instruments that are averaging a modest 6% per year, the difference after 30 years is HUGE.

$5k/year invested at 2% for 30 years = $202,840
$5k/year invested at 6% for 30 years = $395,291

That's nearly double the total return based on the rate of savings alone, with the investment amount held constant.

Or, put another way, I'd have to invest twice as much, nearly $10k/year, at 2% to get about the same return as $5k/year at 6%

And 6% is a really conservative number. Over the past 50 years, the average annual rate of return on stocks has been over 10%.

 

[Pablos Tunnel]

Most of what you have written makes sense, but when I read this and thought about the difference between someone sticking their savings in a 2% account (which has been under 1% for the past several years), versus putting their savings into other instruments that are averaging a modest 6% per year, the difference after 30 years is HUGE.

$5k/year invested at 2% for 30 years = $202,840
$5k/year invested at 6% for 30 years = $395,291

That's nearly double the total return based on the rate of savings alone, with the investment amount held constant.

Or, put another way, I'd have to invest twice as much, nearly $10k/year, at 2% to get about the same return as $5k/year at 6%

And 6% is a really conservative number. Over the past 50 years, the average annual rate of return on stocks has been over 10%.

I understand. My point is do not focus solely on rates of return. Rather focus on saving as much as possible. Listen life isnt a straight line. You are not going to have all your eggs in one asset class like stocks. Yes stocks have done well when the investor is patient. But to really build wealth you will have a mixed bag. For instance investing in your business which may return better than twenty percent and still have systematic dollars going into your K plan too plus maybe an overfunded insurance policy and maybe some real estate as well. Think big picture.

 

[Zambo]

Don't forget real estate. People often ask me how I can afford to live in Kali. The answer is that my house has been appreciating on average $3500 per month since I bought it at the bottom of the market 7 years ago. Yes, there will be swings in the market but over time if you buy in a desirable place the value is as guaranteed to go up as much as nearly any investment. Just one more way to accumulate the assets you need to retire down the road. Throwing money away on rent just makes it harder down the road.