Hey everyone, it’s Finance Fridays again. Today we’re going to do a little refresher about some basic finance stuff. Today’s post is about “The Mountain Revisited“.
Mountain? What Mountain?
Perhaps you forgot about my prior post, Many Paths to the Top of the Mountain. If you haven’t read it, go ahead and give it a read, since I’ll be referring to it in this follow-up post. Don’t worry. I’ll wait.
Ok, I’m caught up now.
Ok good.
The main point of my post is that there are many paths to attaining a comfortable retirement at a reasonable age. My path toward a career was much longer than my friend’s, but that also affords him a significant head start on his retirement. In the end, we’ll probably be able to retire around the same time without too much difficulty if we follow our plans through to the end.
So why are we revisiting the mountain?
Well, I have another real world example. I have another friend, we’ll call him K (this is a different K from the one I mentioned in the prior post). Like M, he’s been working and putting away what he thought was a good amount of money every year. Anyways, I guess he heard from someone that I know about finances a bit so he asked me for my help.
So I took a look at what he was doing for retirement:
First thing first. K just turned 40 and has been working for awhile now. His employer matches up to 5% of his pay, so he was advised to contribute at least that much. He even thought that hey, I can put away more than that and be ok, so I’ll put away 11%. This is good, it implies that he was trying to save more than “advised”.
However, because his salary is about $60000/yr, 11% ends up being around $6600 a year. Of course, this is nowhere close to maximizing his 401k which is $18,500 for this year and $19,000 for next year.
I must also add in that he works a 2nd job where he earns between $30000-$40000 a year mostly secondary to overtime hours and working overnight.
So the first thing I asked him was:
“Do you think you can afford to put away more money?”
His answer was “I can put away more?”
At this point it dawned on me that there are many, many people who don’t realize what the limits for 401k are.
So I asked him how much more he thought he could put away of his primary salary. He told me he his primary salary usually just goes to the bank and sits there. Most of his expenses are paid via his 2nd job.
So I thought about it a bit and then said:
“Do you think you can put away $731 a paycheck without too much problem?”
(He is paid biweekly, and will have 26 pay periods in 2019.)
After a little bit of thought, he said yea, that shouldn’t be a problem.
“If I have money, I spend it. But I could save it instead without too much difficulty.”
Unfortunately, it was too late for him to adjust for 2018, so we just set himup for 2019 to put $731 of his biweekly paycheck toward the 401k. This would allow him to maximize to the new limit of $19k as well as his employer match.
Then I asked him:
“How are your funds allocated? How much stocks or bonds?
This question was met with a vague answer that he had “changed it awhile ago,” but didn’t know what it was.
After looking at his recent retirement statement, I saw that about 85% of his fund was in bonds and only 15% was in stocks. This is WAY too conservative for someone who is 40 years old.
I immediately understood what happened. When he originally started putting money away, it was put only into bonds for a few years. It was only recently that he tried to add stocks to the mix, but he only changed the contribution allocation and didn’t rebalance how much he already had.
After a brief discussion and explanation, he settled on a 70/30 stock/bond split – similar to what I have. We were able to rebalance his current 401k and then also change his contribution allocation to 70/30. I felt 70/30 was reasonable, since he is 40, and age minus 10 in bonds.
I told him to try to rebalance once a year or so, and if he needed help he can ask me — but I think he gets it now.
Wow… so he’s on track now right?
Yes.
His previous path to the top of the mountain was ok. This is mostly because he will also have a pension to work with as well. However, after talking to him a bit, I think we were able to make his path to the top a little easier and probably a little shorter.
If, for some reason, he has a hard time saving that much money, we can always decrease his contribution from $731 to something more manageable. However, he seemed pretty confident that it wouldn’t be a problem.
What’s the take home message?
Honestly, while it may seem boring, these seemingly small changes will make a huge difference to his retirement. If I had never talked to him about it he would probably have carried a primarily Bonds retirement account for the next 20 years while only putting in $6600 a year, when he could save significantly more without any change in his lifestyle.
Once he turns 50, we’ll talk about catch-up contributions. However, I didn’t want to overload him with too much information at one time.
His previous plan was to basically just never retire. Now that I have opened his eyes, I told him he could probably retire at 62 or even 58 depending on if has a home paid off or not yet. This could be even earlier if his house is paid off early and he keeps his spending habits low.
The main costs of retirement are where you live and healthcare costs. The ability to retire becomes much more plausible when you have a paid off house or condo to live in. Then it just comes down to how much money can you live off of and still be comfortable and happy?
TL;DR
Just Another Path to the Top of the Mountain
Small changes early in your career make a huge difference later on.
Don’t be afraid to talk about retirement.
Ask questions about retirement now, not later.
Share your knowledge with others.
They don’t have to follow your advice, but at least try to show them the way.
-Sensei
Agree? Disagree? Questions, Comments and Suggestions are welcome.
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