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Read this post today, and I was pretty skeptical. Any time you don’t consider tax consequences pings my radar pretty good. Anyway, I wrote Jim (the author of the blog) an email that I’ll reprint here. All in all, I like his blog; I’ve got it on RSS and read it all the time. I just didn’t agree with this particular post of his.
I’m a reader of your blog, and was curious about your post today, stating that you could save $700/month and retire in 40 years, withdrawing $5000 in 2007 dollars. No offense, but I was immediately skeptical when your first assumption was no tax liability. I think your assumption of 3% inflation rate is low, as this is pretty close to CPI, which exempts food and housing (unfortunately, real people can’t exempt those things). And, just to make things smooth, I assumed an 8% return on investments for the entirety of the scenario. This also assumes that the entire amount saved for the year is placed in the account on the first of the year, to capture the full compounding.
I’m attaching an .xls workbook which shows two scenarios: the first assuming the funds are invested in a taxable account (such as a standard 401k, IRA, or just a normal brokerage account), and the second shows a tax-advantaged saving plan (such as Roth IRAs or a Roth 401k). These Roth vehicles currently have contribution limits ($15,500 for the 401k, and $4,000 for the IRA, for a total of $19.5k a year contribution limit).
As you can see, for the Roth vehicles, you’ll need to save close to $17,750 a year, and that assumes that you deplete your nest egg down to near 0 at the end of the 25 year window. I’m assuming that with advances in medicine and science, one could probably expect to live beyond age 85 (assuming this is the 65th year of the scenario) by the year 2072, and you may want to ensure more length to your balance. A bigger balance will require more savings, obviously. With the fully taxable withdrawls seen in a regular 401k or the like, you’re looking at closer to $2,000 a month contributions; again, depleting your nest egg to 0.
I think you underestimated the amount necessary to withdraw, as inflation will continue throughout the scenario, not just ending at the 40th year.
Anyway, take this for what it’s worth. I didn’t want to post a comment, as I wanted you to have a chance to take a look at my calculations; it’s quite possible that I goofed something up. Enjoy your blog; wouldn’t be a repeat reader if I didn’t. 🙂 Hope you have a good day, and I’ll look forward to hearing your thoughts.
So, anyway, there you go. You can see the file I put together for Jim here, if you want to look at it. The moral of the story here is: be serious about your retirement savings. You’re gonna need a lot of it.
I’d like to quote his closing thought on this topic, then ramble a bit on my own:
“Different people have different talents and different ways to give of themselves. What matters is that you actually do give, whether it be working hard so that you can make a donation to help a cause or directly working for that cause. What matters is that you put your talents to work in the end for a cause that is important to you. To me, that’s what a spiritual life is all about.”
Now, I will disagree with him on his comment that living the spiritual life is concerned with DOING something. But, not knowing Trent or his personal views on religion, I won’t quibble on semantics. That’s not the point here. I do think, however, that he captured a truly important concept in that paragraph that I feel too many “spiritual” people skip right over.
You not only owe it to yourself and your family, you owe it to the world at large and to God to be financially successful to the point where you can share some of your wealth with others. Some of you might think that you don’t have “wealth” to share, but I assure you, you do. Per capita income in developed countries is so far being the imagining and dreaming of residents of developing countries, it’s unbelieveable. Dollars a month (“the price of a cup of coffee a day”, as the Christian Children’s Fund commercials tell us) can guarantee one child food, immunizations and an opportunity at education. How in the world can we, as compassionate people, not find some change rolling around in the couch cushions for this?
So, as I mentioned previously, I was raised by a financial advisor. My dad made me save 50% of everything I ever earned, and I didn’t get to decide what I was saving for. It was just gone. I didn’t get an allowance; I had to do work. Not household chores, mind you, but mowing lawns or paper routes. Nothing was given to me. I didn’t appreciate it at the time (boy, did I hate handing over 50 cents on every dollar), but, when I cashed out a mutual fund to pay for my first year of college, I discovered my dad was pretty smart after all.
Will I make JD Jr. save 50%? Probably not. I felt it was restrictive, and it really didn’t give me a lot of money to learn how to spend wisely. It took too long to save up for anything, so I just frittered it away on nothing. My money problems came when I started college. I got a credit card (heard this story before?) and ended up running up a pretty big bill that I didn’t have any way to pay for. Due to some other choices I made, not related to the credit card at all, I ended up having to drop out of college and get a job half way through my junior year. Not having a degree meant I wasn’t qualified for much except manual labor or factory work. I chose the latter, because I could work nights and earn shift differential.
Let me tell you, $9 an hour does not go very far when you have to pay for rent, food, student loan bills (those showed up after I had exhausted my savings mid-way through my sophomore year), a car payment for a crappy used car, and credit card debt. I distinctly remember depositing a $600 and some odd check at my two week pay day and still being overdrawn at my bank by over $100. Those were not fun days.
When I was 25, I joined the Army (it was just after 9/11, and I wanted to do my part). I met my soon-to-be wife in basic training, and we were married 9 months later. She had debt, too, but we resolved that we were going to get out of it as soon as we could. We got married five years ago next week, and combined, we had over $40,000 in consumer debt. Today, I am proud to say that it’s less than $10,000, and that is on one car payment. We carry no credit card debt and live very frugally in an attempt to pay that off as quickly as possible.
So, I believe it can be done. For us, it came down to understanding that we really were in control of our lives. Both of us want to travel, work in foreign countries where we’re considered the outsiders, and give back to the world. We realize that those types of jobs don’t typically pay very much, so we know that we have to develop a lifestyle that’s rather spartan in order to be able to subsist on substantially less than what we currently make. It all comes down to crystallizing in one’s mind what is truly important to that particular person. Not everyone has to have my dreams, but everyone needs some dream. Once you decide what’s so important to you that you can’t live without it, then you’ll start doing what you need to do to make it happen, no matter how (temporarily) painful the process.
The Motley Fool says you need to suck it up, and I agree. 10% is a bare minimum, and most of us need to be saving more. Especially in the past few years, the real estate run-up has caused many people to discount the need for savings and view capital gains as a means to ensuring your retirement income. The plateau (and in some places, precipitous decline) in real estate prices caused by a glut of inventory on the market, coupled with the slowdown in sales may have opened some eyes, but I still worry that some folks view it as a temporary speed bump on the highway of home appreciation.
So, what can we do to free up some cash flow for savings? The usual: cancel your cable, don’t eat out as much, quit drinking lattes, blah blah blah. All good advice, but it seems to me that, unless you’re actually redirecting that money into some type of investment vehicle (your emergency fund stashed in an ING Orange Savings account, some index funds, or the like), you’re not really improving your financial future.
My counsel to myself was to learn to live on 75% of my income. Honest confession: I’m not there yet. I’m only at 80%, but I’m working my way to 75%. I believe (especially if you didn’t do what you should have been doing in your 20’s and started with the 10% savings from your first post-school paycheck) that I probably want to put away 15% of my pay every pay check. I don’t plan on spending my raises, either. Those go right off the top (as do bonuses) into savings. And, I give 10% to a charity I believe in. Every pay check, without fail. The tax deduction is great, but the intangible benefit I get by sharing a part of my income with those less fortunate than I goes far beyond the reduction in my Adjusted Gross Income.
Later on, I’ll be explaining how I got to where I am today financially, and where I’m going from here.
So, check this out. I don’t know about you, but I’ve got a case of wanderlust that keeps getting in the way of me truly focusing on my 9 to 5. I’d much rather be hanging out in Costa Rica or seeing the sights in old Europe than watching JD Jr. grow up in pictures on my desk. There are plenty of companies out there today that offer remote working arrangements (Best Buy has everyone in their corporate headquarters on a flex time program, what they call ROWE, or Results Oriented Work Environment), where all you really need are a laptop and a wifi connection. Teleconferencing can work from anywhere in the world, even the most remote locations (if you have a sat phone). Why do we need to be tethered to a desk in order to prove our productivity? Granted, this article is aimed at folks with more maturity and time in the workforce than I have, but still…
Tim Ferriss, in his book, The 4 Hour Work Week, talks a lot about strategies for liberating yourself from the 9-5, allowing you to work on your terms wherever you want to. Be honest: how much time do you really waste sitting at a desk, reading email, or being distracted by conversations going on around you, or sitting in meetings in which you have nothing to add? Maybe you couldn’t get everything done in 4 hours a week, but Tim makes a pretty convincing case through the power of the Pareto Principle (also known as the 80/20 rule: 80% of our results come from 20% of our activity) and Parkinson’s Law (tasks expand in time required to complete to the extent that we allow them to) that we could get our stuff done a lot more efficiently than we do without any loss of effectiveness. I’m not sure I totally agree with everything he says about how to go about freeing yourself from a scheduled working arrangement, but the core nuggets relating to freedom from a schedule certainly are appropriate.
So, here I am, typing away, looking to bare my soul to you folks. “What?”, you ask. “Another self-absorbed personal finance blogger? Why in the world do we need any more of those? What does he hope to accomplish by this?” Well, I’d like to gain some semblance of a readership, have a little fun, exchange some ideas on what it takes to be financially secure while you’re still young enough to enjoy it. I’ll tell you about my goals and dreams, and maybe we can drum up enough common sense between all of us to make our goals realities.
“No get rich quick schemes?” You won’t find many of those here. I do believe that people can and do get very wealthy through many different vehicles in this life. Slinging rock on the corner, donating plasma, even Amway and other MLMs have generated funds for certain people to subsist off of (some methods of moneymaking generate more funds than others). However, for the vast majority of us, the only thing that makes sense is to find a need and fill it. Does that mean starting your own company? For some it does. But, even those of you/us with a J.O.B. (my dad, entrepreneur that he is, won’t even say the word) are filling a need for someone, and being compensated for it. Find what makes you happy. I’m a big believer that what you do should not identify who you are, if you don’t want it to. If your self-worth and primary source of happiness comes from being an attorney, that’s cool. However, if you’re only a financial analyst to pay the bills, and you would rather do something else with the rest of your time, more power to you.
“So, what qualifies you to talk about this stuff?” Same thing that qualifies you to ask the question; it’s a free country (at least, it is where I live. Sorry if you live in North Korea [but kudos on finding your way to my site through all the censor-ware!]). As I mentioned, my dad’s owned his own business since almost as far back as I can remember. He’s a financial advisor. Got a lot of good info from him, as well as an interest in how people use their money to plan (or not) for their future. I’m a corporate financial analyst myself (with a Fortune 500 company, no less), and I’ve got an MBA in Global Management from Thunderbird School of Global Management. Well, depending on when you read this, that is. I graduate(d) in April of 2008. I’ve also got half a bookcase full of personal finance books. Everything from Benjamin Graham to Robert Kiyosaki, and a bunch of stuff in between. I won’t be giving any advice, but I will be telling you my opinion on what makes sense in my situation. You can apply it however you’d like.
“Is it all going to be personal finance?” Ehh, maybe. Probably will be split between finance and personal development for the most part, but there are other things that may come up, as well. I’m constantly fascinated by leadership development, personal finance, baseball, you name it. I’m just like you (I would assume); I’ve got lots of diverse interests. I was a philosophy major in college, so I might slip in some quotes from Plato every once in a while. When something strikes me as being able to improve our enjoyment of the time we have on God’s green earth, I think it’ll fit with the nature of this blog.
So, that’s what we’ll be doing here. The title of the blog is “Personal Development”, plain and simple, because I feel like so many of us young(ish) careerpeople aren’t really taking life seriously enough. “Failure to Plan is Planning to Fail”, remember? Paying attention to bettering yourself, be it financially or through personal development, doesn’t have to be drudgery. On the other hand, it doesn’t just happen, either. So, take a little time, each day, to think about how you can get down to doing the things you need to do to improve what’s going to be a great life.