Monthly Archives: April 2015

Saving for Retirement

The most important thing for saving for retirement..

..is to START

saving for retirement

When saving for retirement, time is your biggest asset. On the flip side, time can also be your biggest enemy if you’ve put if off for years.

The sooner you start saving for retirement, the more time the power of compounding can do its magic and the easier it will be to accumulate wealth.

If you’re first starting out in the work force at age 22, a fresh college graduate, considering “normal” retirement age of 65, you would have roughly 43 years to save for retirement.

You would think, “that gives me plenty of time to save for retirement. I can always start later.” And you would be right, but you would also be contributing more on a monthly or yearly basis to reach the same monetary goal the later you start.

For instance, to reach a goal of $1,000,000, you would have to contribute roughly $2,137 a month based on a 6% return for 20 years.

On the other hand, to reach the same goal of $1,000,000 over a 30 year time span, you would only need to contribute roughly $994 a month based on the same 6% return.

The longer you put off saving for retirement, the more you’ll have to contribute to reach the same goal. So, start early!

How much to put away?

Conventional wisdom says to put away at least 10% to 15% of your annual salary towards your retirement savings. That is certainly a great starting point, but as a panda who will live well past the age of 20, I’m anything but conventional, but we’ll get to that later.

Saving for retirement can be any combination of 401k, IRA, taxable accounts, and employer match.

The key to this is ensuring you contribute enough to get the full company match. If you don’t contribute enough to get the company match, you’re essentially missing out on free money.

401k contributions

Since 401k contributions are taken out pre-tax and before you ever really see the money, you probably won’t even miss it being taken out every paycheck. This is considered automated investing (saving for retirement). The money is taken out of your paycheck automatically and invested in the fund(s) you picked.

Typically, I like the idea of putting just enough (perhaps a little bit more) into your employer’s 401k to get the company match. The amount you contribute in addition to your employer’s contribution match can add up anywhere from 6-10%, which is a great starting point to start saving for retirement.

Company 401k plans are generally restrictive in terms of what funds and investments they offer. Fees are also a big downer in many company-sponsored 401k plans, especially for small companies, where the fees could hit 2-3% annually. In my opinion, this is way too much and not worth contributing to a tax-deferred plan if the tax savings is going to be eaten away by annual fees.

It’s better to open up a brokerage account with a similar low-cost fund that doesn’t eat into the earnings and have to pay taxes on the earnings than to lose the annual fees, which takes into account the entire account balance. You’d lose more to fees than taxes would take out of any earnings, so it’s best to make sure you take a look at the company sponsored funds and their returns and their related account fees.

If you’ve decided that you can live with the fees, historic performance, fund goals, etc., of your 401k plan’s offerings, it certainly doesn’t hurt to max out those savings if you can.

Make sure you look at your own individual situation before making any decisions.

Save past retirement accounts

Once you’ve set up your automatic 401k contributions, the next step is to take a look at putting money away in IRAs and/or regular taxable accounts. You can put a maximum of $5,500 in a Traditional and/or Roth IRA per year combined between the two. If you make too much to contribute to a deductible IRA and a Roth IRA, you can read about my take on the Backdoor Roth IRA.

Save as much as you can now, and odds are, you’ll continue your savings throughout your working years. After all, you can’t really miss what you don’t have if you’re saving most of your excess income for retirement.

Another method is to start by automatically putting away 1% of each paycheck, or whatever you can manage at this time into a separate “saving for retirement” account. Then, continue to increase that amount by 1% of each paycheck every month until it starts to hurt financially.

Similarly, you can also put away money for a specific goal (renovation fund, new car fund, etc) by setting up automatic savings.

Remember, the more you put away now, the easier it will be to reach your financial goal, regardless of what it may be.

How much is enough?

There isn’t really a hard, set number as to how much is enough to be saving for retirement, but I like to say as much as possible depending on your own financial situation and goals.

We are probably putting around 35% of our annual pre-tax income into retirement savings, with hopefully a trend towards 40%. This includes 401k contributions, employer match, IRAs, and taxable accounts. We are maxing out one 401k and not contributing to mine due to excessively high account fees (2-3%) and putting the maximum amount into IRAs every year. Plus, whatever is left over from student loan repayment and activities of daily living are put away in a taxable account.

Once my student loan payments are done, I hope to be putting away 50% for retirement to perhaps retire even earlier than 45. *crosses fingers*

You can also take a look at my investment strategy for 2015 to pick my brain a little. It’s probably very basic, but my mind kind of goes a mile a minute and I probably don’t explain it in detail.

saving for retirement

There are plenty of savings calculators out there that you can use to see how much and how long you would need to put away to reach a certain financial goal based on a particular annual rate of return.

I highly recommend you do some of your own research before tweaking your own savings contributions.

Hobbies and Recreation

All work and no play..

..makes Pete a dull boy.

With all the hard work you do, the 8 hour workdays you put in, you need a release from the automation of working week in, week out. It’s almost as if you’re stuck on autopilot and it takes a lot of work to get out of it and go out and do something.

I feel like that almost everyday.

I wake up in the morning.
Get ready for work.
Go through the motions.
Come home.
Eat dinner.
I’m exhausted.
Go to bed.

Same routine. Every. Single. Day.

Time to find some hobbies.

Spending money on hobbies?

I’m always hearing about my friends going out, doing this, doing that, and I always wonder, “seems like an expensive hobby..”

People go out to bars and clubs and spend hundreds of dollars on their tabs before the night’s over, and they repeat this every couple of weeks. I suppose it’s a social life and to each their own, but it seems like a waste of money to be going out all the time and paying $15 per drink and spending hundreds of dollars every weekend for a social life. Once in a while is understandable and okay, but every weekend seems excessive. Certainly not something for me.

I may just be cheap or frugal, but I think it’s just what one is willing to spend money on.

Everybody’s interests are different, as well as their willingness to spend on certain activities.

One person might enjoy snowboarding and be willing to spend a hundred dollars to go snowboarding every month.

Another may enjoy go-karting and spend a couple hundred dollars to race every month.

Golfing, between buying clubs, green fees, and golf balls, a couple hundred dollars would not be an extreme figure either.

If it makes you happy and you enjoy doing it, by all means. Moderation is key. There is no real reason to buy the greatest and latest snowboard every year, or to buy that $5000 golf club when what you have is good enough.

I always look at the price to reward ratio in all aspects of making a purchase.

This is, is the price I’m going to pay for this (whether it be for a game, food, or anything else) worth the reward or satisfaction that may result from this purchase?

$20 for a hamburger with cheese, mushrooms and onions? Probably not.

$100 for a new fishing rod? I’m not a professional, so a $30 one will probably do for me.

$20 for a filet at a nice restaurant for a special occasion? Might go for it since it’s a special occasion.

Hobbies don’t have to be expensive

Hobbies don’t necessarily have to be super expensive.

A basketball costs $10, and there are courts almost everywhere. You just need to find a free court to play on, or you could always join a pick-up game and have fun.

Tennis seems to be gaining popularity as well. A beginner’s tennis racquet costs around $50. Add in the grips, tennis balls, and a sweat band if you really want to look the part, and you can find a friend to go play some tennis and get a workout at the same time.

Hiking is a relatively cheap hobby as well. A good pair of hiking boots, some gas to get to and from, and a packed lunch, and you’ve got a day of hiking and exploring the wilderness. Even more fun with friends who also enjoy hiking!

Kind of seems like there’s a fitness theme going on here with relatively cheap hobbies and recreational things. As an added bonus, it’ll help keep you fit and healthy.

There are probably a million other inexpensive hobbies out there and I’m sure you’re a smart guy/girl/person’s of a non-male/female gender. You can figure something out that doesn’t always have to cost and arm and a leg just to do and enjoy.

It doesn’t need to be expensive, just something to get you up and out and moving again.

Personal hobbies

As a person with relative type B personality, I tend to be more thoughtful and easygoing in life with a splash of competitiveness. Because I am such a stickler for saving money and ensuring I have money for the future, my hobbies tend to be on the moderate side.

Fishing

My biggest and favorite hobby is fishing.

As a child, I went out fishing off bridges and near water banks with friends using a Sprite bottle spooled with fishing line and a hook with chicken liver on the end. We fished for catfish for fun and always had to hand-line the fish in since there was no reel. We weren’t poor, but we weren’t rich either. We were having fun, and that’s all that really mattered. It didn’t matter that we didn’t have a rod and reel  with all the fanciest baits and line. We had fun.

Fast forward to today. It had been years (through high school and college) since I had gone fishing and my father-in-law rekindled that childhood memory of the joy fishing could invoke in me. Now I have a job, and I have money.

Even so, I only buy equipment when they’re on sale. Most recently, I bought a Pflueger President fishing reel as a medium-light tackle reel mainly for freshwater fishing for bass, something I haven’t been able to do, but am super excited for spring to finally come around so I can get out there and go fishing. Otherwise, I’d just as well slowly collect more fishing gear when they’re on sale or as gifts.

I did, however, manage to spend $526 on a lifetime saltwater and freshwater fishing license last year. It does seem pretty expensive, but the lifetime license pays for itself after 12 years if I were to buy a yearly license for both fresh and saltwater every year, which I would have planned on doing anyway.

What would make my fishing hobby expensive is the purchase of a fishing kayak or boat. I keep teetering on and off the fence about getting one, but with no space to store it, the obvious answer is to hold off on buying one.. for now.

Best place to start is to search

Even if you don’t really have a hobby now, it’s never a bad time to look for one and get out there and enjoy life. There’s no point in slaving over working to save up for a rosy retirement if you’re not going to enjoy life in the moment.

I will admit that is something I need to work on myself, but we can work on that together.