Getting on the Path to a Carefree Retirement


 Getting ready for retirement should be the easiest thing there is.  After all, you have about 45 to 50 years to get ready.  Yet there is something about a goal that is both big and far in the future that makes people not plan and not act until it is maybe too late.  To be ready for retirement today and generate an income of about $50,000 per year, you’ll need something like $1.3 to $1.5 M.  To be safe, I’d want at least $2 M.  That’s an awful lot of money.  For those starting today, the numbers will be probably $2.5 to $3 M for the same standard-of-living.
Yet if you’re working a job at 16 and put away just $1,000 into an IRA invested in a total market mutual fund, you’ll have about $500,000 at retirement age assuming you don’t touch the money between now and then.  Put away $6,000 into an IRA between ages 16 and 18, working summer jobs, and your retirement will be all but guaranteed.  Put another $10,000 away before age 25 and you’ll have the money to live a very nice life in retirement.  Easy.

 

              

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But people don’t do this.  They spend all of their money from jobs as teenagers on a car to get them to work which is rusted away and gone before they are 20.  In their twenties they blow their money on time shares, vacations, eating out, drinking at bars, lattes, and a bigger house than they can afford and before they know it, they’re 45 and have not started funding their 401k yet.  This is particularly bad given that they could have gotten tens of thousands of dollars extra from their employers if they had just contributed to the 401k plan since it typically comes with a match.  If they did start a 401k, they probably cashed it out each time they changed jobs, paying out 35% of the money to taxes and penalties, so that they started over again each five to ten years.

The numbers also seem daunting.  Imagine saving up $3 M over a career.  Even if you average $150,000 per year, you’d still need to be putting away more than a third of your income – about $65,000 per year – to reach $3 M by simple saving.  That’s a lot of self-denial, especially given that $150,000 will feel a lot like $75,000 by the time you near retirement age.  And there are all of those costs like insurance, mortgage payments, student loan payments, college costs for your children, and car payments from new cars every few years.  Many people just decide to “live for today” and worry about saving tomorrow.  The trouble is, hitting retirement without a savings will probably not work out well.  Continuing to work until you die isn’t always an option either since sometimes you get sick or you get laid off and no one wants to hire a 65 year-old who expects a high salary.  Don’t let that be you.

 

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Get on the path to a retirement sitting by the pool with your home paid-off and maybe a vacation home on the beach or in the mountains.  Be able to travel through your golden years to see the world or see family.  Be able to go out to nice dinners and stay at the nice hotels.  And be the guy or gal at church that always makes the secret donations when something needs to be fixed or built.  Here’s how:

  1.  Pick a career that provides a decent income.  Find something that people need, not just something you think is fun.  If you can find something that is both, good for you.
  2. Start putting away money for retirement early.  The sooner you start, the more time your savings has to grow, which means you’ll have more money to enjoy later in your career.    Put away 10-15% of your income from age 20-40 and you can slack off in time to pay for your children’s college bills or just expand your lifestyle in your forties or fifties.  Start in your teens and you’ll really get to enjoy the power of compounding since contributions at age 16 will double an extra time compared to contributions at age 22.  That means $250,000 turns into $500,000!

 


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3.  Leave the money in your retirement plans alone.  Pulling your money out of your 401k, or giving yourself a loan from your retirement plan, if the surest way to really mess up your retirement.  Leave things alone.  Save money elsewhere so you’ll have cash for things like starting a business in your fifties or upgrading your kitchen.

4.  Diversify, but concentrate in common stocks.  Stocks will provide the greatest return over long periods of time, so you’ll want to have mainly stocks until you are within about five years of retirement.  Spread this out to different segments of the markets since different sectors do well at different times.  Plus, don’t forget about a modest international holding.

Follow me on Twitter to get news about new articles and find out what I’m investing in. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. 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. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Ten Things I Learned While Working for the Rich


I read a great article from Free Money Finance on the things he learned about how rich people handle money while working as a financial adviser to ultra-wealthy clients.   Basically the things you learn from The Millionaire Next Door hold true.  The wealthy people he met didn’t tend to drive fancy cars or wear expensive clothes.  He also found that they were very nice people who were involved in their churches and their communities, not the evil, arrogant, elitist folks the stereotypes would have you believe.   Check out the full article here.

 

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Have a burning investing question you’d like answered?  Please send to vtsioriginal@yahoo.com or leave in a comment.

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Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. 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. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

A Tax System for a Productive Society


As President Trump rolled out his tax plan, one area that corresponds with his campaign promises is a cut in the corporate tax rate.  During the campaigns he said he would cut it to 15%, maybe 20%.  Now it appears that he is eyeing a cut to 15% from the existing rate of 35%.  This has caused some to declare that the rich corporations are getting richer at the expense of the poor.  Yet really, since businesses just pass through costs to consumers, and a tax is just a cost, who is really paying the corporate income tax?

The cuts on the individual side in the Trump plan are a bit less exciting.  Many rates would stay about the same, except there would be a virtual exemption for the first $24,000 of income.  The top rate would only fall from 39.5% down to 35%.  Still, we’re hearing the usual calls from progressives of how the rich are getting a big tax break while the poor and middle class get nothing.

Really, though, what is the purpose of taxes?

The purpose of taxes is to raise the money needed for government functions.  But oddly, some people seem to feel that taxes are to be a punishment for those who make “too much money.”  Originally it was probably just the idea that those who make more would be able to pay a greater portion of costs, kind of like when your parents pay when you go out to eat while you’re in college or just starting a first job.  Or maybe it’s more the thought that those who don’t make much won’t be able to pay much if anything in taxes.  That idea morphed into the idea that those who had more burdens, like children to raise, health expenses to cover, and a bigger mortgage payment, should be given a break since they have less money available to pay taxes.  Somehow along the way it became virtuous to have obligations and make little money and evil to have few obligations and make more money.

              

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Now the thinking goes:

1.  If you make little money or no money, you should not pay taxes and maybe even get money from the tax system.  You should also get a lot of services even though you have paid nothing for them.

2.  If you make more money, you should pay more in taxes and pay at a higher rate.

3.  If you make a whole lot of money, you should pay really high rates.  Maybe above a certain amount you should just have it all confiscated.  (After all, who needs that much money?)  Not only that, but you should also not get to deduct your obligations, and you should not get to partake in many of the services provided by your tax dollars, at least without paying again.

As an example of denying those who make above a certain amount access to services, both Bernie Sanders and Hillary Clinton favored providing free college, but only to those making less than $125,000 per year.  The wealthy would be paying most of the taxes, providing the money to pay for those colleges, yet their children would not even get to go to those colleges without paying again.  After all, why should some son of a billionaire get to go to college for “free” just because his parents paid for it?

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Note that nowhere in the calculus is the amount of effort an individual puts out included.  If someone does nothing all day and therefore makes no money, he is still rewarded.  If someone works 100 hour weeks to make $150,000 per year, he is punished.

Effort is punished.   Resting is rewarded.

But what do we want people to do in a society if we want a wealthy society with lots of wealth to go around?

We want people to do things.

We want them to grow crops so that there is food to eat.  We want them to build houses so that there are places to live.  We want jobs, so we want people to start companies and grow them to the point that there are lots of jobs.  We want lots of managers and supervisors, since those are higher paying jobs, so we want big companies.  In general we want almost everyone working, using their time to make things, so that there are more things to go around.

But think about the tax system described that rewards you for doing little or nothing, but penalizes you for doing a lot.  If you lay around on the couch, you get free stuff and money.  You pay no taxes.  You are considered noble.

If you spend a lot of time working and creating things, you are considered less noble.  You are made to pay more.  You get less free stuff.

If you start a big company and employ a lot of people, you are evil.  You are made to pay a lot as punishment for your sin of making a big company that employs a lot of people.  You get no free stuff, even though you are providing the money that is providing that free stuff.

The current system encourages people to do little or nothing.

You would not want to do too much, or you would be punished.  You get to keep all of the dollars you make between $0 and $20,000, but only 85 cents on the dollar between $20,000 and maybe $80,000.  You also don’t get as much free stuff as you make more money.  Over a certain level, you only get to keep 60 cents for each dollar you make.  If we go back to where we were in the 1950’s before President Kennedy started reducing the top tax rates, at a certain point you would only get to keep ten cents for every dollar you make.   This system does not encourage people to produce and do the things.


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This system does not encourage people to be productive, which is what you want to have a wealthy society with lots to go around.

So what would a system that encourages people to produce, and make jobs, and build big businesses with lots of high paying jobs look like?  Well, it would not penalize people for being productive.  You would not get to keep a smaller portion of each dollar you make as you cross certain income thresholds.  This sounds like something like the flat tax or the Fair Tax,  In fact, maybe there would be an incentive to make at least some minimal amount – to produce at least something – so that everyone would at least spend some of their time working to produce something.  Maybe a flat tax where receiving any sort of aid required that you have some minimum income level (based on your physical and mental capability to make an income), or a Fair Tax where you get the prebate if you earn a certain amount of income each year.  (Go to Fairtax.org for information on the Fair Tax.

So, while progressives may push back against lowering corporate income taxes and lowering the upper tax rates, realize that doing so brings you closer to a tax system that provides what you want in a society:

  1. Lots being produced.
  2. Lots to go around,
  3. Lots of jobs.

Follow me on Twitter to get news about new articles and find out what I’m investing in. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. 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. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.