Do Yourself This Favor

I’m no financial guru. I’m no wealthy mogul. I’m just a regular guy, raised in a household with core values, who believes in hard work, discipline and an honest day’s pay. I also believe that, when the chips are down, there is only one person I can count on for my future financial security — ME.

Sometimes I reflect on what I would tell my younger self if I had the chance. I have concluded that there is one key piece of advice I would give myself, something which you also can do early in your career to do yourself a HUGE favor, financially. In fact, the younger you do this in your career, the better off you will be, and the greater financial independence and peace of mind you will have in your golden years.

Take advantage of your company’s 401(k)!

That’s it, simple right? You’ve heard it 100 times, probably more. But do you contribute strategically? Do you maximize your contribution annually? Do you fully leverage your company’s match? If you contribute deliberately to your 401(k), and invest even moderately, you likely will have hundreds of thousands of dollars saved for your retirement.

I recall the introduction of 401(k)’s early in my career when companies started eliminating pensions. The burden of having income in retirement was shifted from the employer to the employee. Although it felt like I was losing something at the time, it made common sense to me. With respect to pensions, why should an employer pay anything in the future, to a former employee, when the employee is no longer adding value currently to the business? A pension promise is a liability for the business (or its pension fund), which will have an uncertain future impact. Why should any business bear that burden? Why shouldn’t the employee take personal responsibility for his or her financial future? The employer can make a contribution into your 401(k) if they so choose, at a time when the employee is adding value to them, and at a rate supported by the financial success of the company. The 401(k) essentially places future obligation of retirement income squarely on the shoulders of the employee. My employer contributes now toward my retirement, and I get to decide how it is invested. The investment decisions rest with me, good or bad, to determine how much I ultimately save for my retirement.

“How much should you save in our 401(k)?” my younger self asks me.

The best answer is “as much as possible”, up to the annual limit established by the government. For many of us, however, that much is not feasible. We have obligations to pay on a monthly basis, and we need that cash flow to support our current lifestyle. If you can save the maximum, you will be even better off — CONGRATULATIONS, you are way ahead of the crowd, and you are going to have a financially favorable retirement as you park those savings and allow them to grow over time.

My younger self then asks, “How much is the minimum amount we should save in our 401(k)?” The minimum amount should always be the amount which achieves the maximum employer match.

For example, if the employer matches 100% of your savings, up to 4% of your personal contribution per paycheck, then by all means, contribute a minimum of 4% of your income to your 401(k). You will immediately achieve a 100% return on, or double, your money. What better, no-risk investment can you imagine!?!?Compounding interest will be accrued on that entire amount over time. Let’s suppose your annual salary is $50,000, you save 4%, your employer matches your 4% savings, and you earn average interest of 6% per year. Reasonable, right? You would have over $200,000 saved in less than 24 years. If your salary goes up over time, so does your total savings.

If your employer matches 100% of your savings up to 3%, and 50% of your savings from 3% to 6%, then you should save 6% to achieve that maximum employer match of 4.5% (3% + 1/2 of 3%). That’s an additional 4.5% of your income, added into your account by your employer.

“But I don’t know how I will make ends meet on a day to day basis if I don’t take all of my paycheck home.” This is a very legitimate concern. But ask yourself, can I live on 3% less in my paycheck? 6% less? I have found in my career that there is always a way to make ends meet if I commit to saving a small fraction of my income. You will learn to live on slightly less.

Here are some simple ideas:

• Bring a travel mug of coffee from home instead of buying one on the way to work
• Pack lunch instead of buying out
• Make dinner at home instead of ordering out one more night per week
• Commit to modifying your lifestyle to live within your means.

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“Where should we invest our 401(k) savings?” Everyone has his or her own risk tolerance level and should invest accordingly. I am reminded of a saying that one of my early financial advisors shared with me:?Investment is not about timing the market, but rather time in the market. The earlier you are in your career, the more you can invest in stocks, mutual funds or other riskier investments, because you have time to weather market downswings. You should not plan to withdraw these funds until you are at least 59 and 1/2 years old, when they can be withdrawn without penalty. So you may easily have 30 years to weather financial market events. As you approach the time to withdraw, you should be reducing the risk level of your investments, and shifting toward fixed income choices. Last thing you want is to be forced to sell equities after significant market downturns.

Since my professional career began in 1986, I have seen my portfolio drop on multiple occasions. But every time, the market has rebounded and resulted in excellent gains over the long term.

How are you preparing for your financial future? Are you counting on your employer to provide an income stream after you retire? Chances are, your employer no longer provides a pension to its employees, at least not to those who were hired on or after the date that you were.

Are you counting on the government to provide an income stream after you retire? There is Social Security, which provides some monthly payment. That amount will be well less than what you were used to spending when you actively earned an income. Also, the retirement age of Social Security has gone up, meaning you cannot begin receiving payments until you are older than before, or if you begin receiving payments at a younger age, payment will be at a significantly reduced rate.

Are you counting on an inheritance? While inheritance may provide some assets to your financial future, it is highly uncertain as to timing. Do you really look toward someone’s death to receive a benefit?

In summary, if you live modestly, within your means, and you save regularly through payroll deduction into your 401(k), you will have hundreds of thousands of dollars in your personal nestegg for your golden years. The earlier you start, the more time your money has to appreciate through compounded interest. Take personal accountability for your future; only you will take care of you. Don’t expect anyone else to. Ideally, invest the maximum allowed by law into your 401(k). If you cannot afford that amount, at a minimum, be sure to invest the minimum amount which achieves your employer’s maximum matching amount.

Your older self will thank your younger self, immensely.

#Investing #PersonalSavings #401k #Retirement