Save for Retirement in Installments

IMG_1836Many people find it difficult to save for retirement.  Common reasons are:

“It’s so far off.  I can’t think about that now.”

“I’ve got too much to take care of now.  I’ll worry about retirement later when I get past these upcoming things.”

“You need to save up millions.  I can never do that.”

Because the amounts that they need to save seem so huge, plus retirement seems so far away, many people save little if anything until they are perhaps in their fifties.  By then it is probably too late to save enough for a safe and comfortable retirement. 

They then plan to work forever, or have their children take care of them, or hope the government will provide for them.  All of these are bad plans.  You may want to work for ever, but you may lose your job and not be able to get another one, or you may become ill and unable to continue working.  Your children may be struggling as much as you are, given that many young adults are enjoying a delayed adolescence and not really starting careers until they are in their thirties.  The government can’t take care of everyone and, mark my words, the social programs will go bankrupt and be phased down to essentially nothing within the next decade or two.

Luckily, retirement is a long way off, which gives you the time you need to save and invest, because you do need a lot of money.  If you start early – like with your first paycheck at 18 or 21 — saving enough for a comfortable retirement isn’t really all that hard.

One way to approach retirement savings, instead of looking at the big sum all at once, is to break what you need down into small, manageable increments.  This is the same thing you do when buying a car – you purchase a big thing over a period of time by paying a little each month.  The nice thing about investing for retirement is that interest is actually on your side, so you don’t need to actually save up all of the money you will need.

So, instead of saying that you’ll need $2 M for retirement to replace an $80,000 income (assuming 4% withdrawal rate on a $2 M portfolio), look at putting away $5000 in a year.  That $5,000 will provide you with $200 per year in income – that’s a monthly grocery bill.  Do that again and you’ll have $400 per year in income, every year, for the rest of your life.  Keep building, adding a little more cash flow at a time.  Once you get started, think about the future income you’ll be generating for each amount you put away for retirement.  It’s like planting blueberry bushes, where it takes time and effort to plant each one, and an individual bush won’t make much difference, especially not right at first, but keep planting bushes and you’ll be harvesting gallons of blueberries each year.  And you’ll be doing that every year for ever, not just once.

Use stock mutual funds to cause your portfolio to grow faster.  If you have $100,000 in a portfolio and it is invested fully in stocks, you’ll make an average of about 12% per year (assuming you’re invested for a period of about 10 years or longer).  That means you’ll be adding about $12,000, or $480 in yearly income, to your account each year for free.  Do that for ten years and you’ve added $4800 in yearly income.  Actually, you’ll be adding even more than that because your money will be compounding – interest begetting interest.  Even Albert Einstein marveled at the power of compound interest.   

As your retirement portfolio grows, use the 4% rule to figure out the income you’ll be able to produce.  Not enough?  Keep adding more.

If you ever find yourself thinking about taking the money out to do something else, like start a business or pay of credit cards, do this:  Multiply the amount by 8%, then multiply that amount by 90 minus your current age.  That’s how much money you’re giving up.  For example, if you have $50,000 in a 401K at age 35 and you are about to take it out, your number would be:

$50,000 * 0.08 * (90-35) = $4,000 * 55 = $220,000

So, by withdrawing $50,000 today, not only do you lose the $50,000, but you lose $220,000 in income you could generate during the rest of your life from that money by investing it in mutual funds and withdrawing the income each year, for free.  And that’s without allowing it to compound.

Disclaimer: This blog is not meant to give financial planning advice, it gives information on investment strategies, stock picking, and other matters relevant to the investor. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.


    • 4% is accepted by financial advisors as the amount you can withdraw from a standard portfolio (50%-ish mix of stocks and bonds) and have a good chance of the money outlasting your retirement. Basically it is how much you can withdraw and have the earnings replace the money, plus have enough growth to cover inflation. Some are now recommending 3% for more safety. If you are in all stocks (meaning you have a lot more money than you need since you’re taking a risk of a 50% drop) you could probably withdraw 5-8% since the returns of stocks are higher.

      • Thanks for clarifying. I have some recommendations for some stocks to go in the portfolio in my blog, please have a look if you’re interested.

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