Retirement

A Life Without Debt: Building the Retirement Nest Egg

August 11, 2009 By Sadie Morris 8 Comments

Debt free living has one important benefit that many people don’t consider at first. Sure, it makes bill paying easier and it lets you save for vacations and other fun things, but it also lets you save big sums for retirement. When all of your money goes to servicing debt, not only can you not pay for things like vacations, new appliances, or cars, you also can’t save for retirement. Or, if you can squeeze out a little for retirement, it’s probably not enough to meet your future needs.

Many people have no idea how much money they’ll really need to retire in the way that they dream about. Maybe they’ve run a calculator or two, but chances are they haven’t given it serious thought. They just assume that it will all work out somehow, so they continue to buy things on credit, figuring that paying the monthly payments is enough. Saving will come another day.

Of those that have given retirement serious thought, many of them still aren’t saving enough. They continue to rack up the debt thinking that they’ll save for retirement “later.” Do you know how fast “later” sneaks up on you? One day you’re twenty-five and then the next you’re forty. And from there it’s not far to sixty-five. Then you look around and think, “Huh. I have to keep working because I don’t have anything saved.” If you had started at twenty-five, you’d have a nice little nest egg to draw on.

The thing is, even a couple hundred thousand dollars isn’t going to cut it, especially if you have health issues or you want to travel a lot. To live in any kind of comfort for more than a few years, you’re going to need at least a million dollars. And more is better. Fidelity reports that the average 401K balance is only $62,000 which is nowhere near enough money. Even if some of that average is made up of young workers with years to go before retirement, the average is also made up of many who are closing in fast on retirement. That $62K isn’t going to last a year if you do any kind of spending.

Sure, you may have Social Security benefits coming in (but I wouldn’t bet on it) and maybe a home you can sell for a profit, but where is the rest of that money going to come from? Most people seem to assume some sort of magic will happen and money will appear. So they continue to finance large and small purchases, living only for today and heedless of the distant future. It’s not that most people don’t have a desire to save, it’s just that they prioritize so many things above it that it never gets done. The cruise vacation, the bigger home (when the old home was fine), the upgraded appliances (when the old ones still worked), the nicer cars, and the bigger TV’s all come at the expense of saving for the future. By the time they’re done improving their lifestyle of today, there’s nothing left for tomorrow.

I hear people say, “Well, I might not live to retirement and I don’t want to miss out on the fun in life.” I’m not saying that you can’t have any fun in your youth and that you have to only plan for the future. I’ve had tons of fun, but only fun that I could afford to pay cash for at the time. I pay my bills, then fund my future needs (short and long term), and then have fun with what’s left. Yes, there have been some years when I didn’t have a lot of fun because there wasn’t enough money to go around. Yes, there were years when I made that appliance stretch a little further and prayed that the car would last. I don’t get to do or have everything that I want when I want it. I have to choose between options and sacrifice something in order to get something else. But I’ve always known that I’m going to want to quit working one day and have other kinds of fun. And when I’m too old for fun, I want good care in good facilities. I don’t want to be at the mercy of the State. I’ve laid my plans with those goals in sight and sought balance between fun now and in the future.

Being debt free has allowed me to amass a nice nest egg and I’m not yet 40. I’ve been able to contribute to 401K’s, IRA’s, and now a SEP. I’ve also saved some money in non-retirement accounts and CD’s. In less than five years from now I will have reached my retirement goal, thanks to starting early, aggressive saving, and the power of compound interest. I might scale back my savings some then, but I’ll still keep adding to it because I don’t want to be caught short.

How is this possible? How can I be so relatively young and so close to my retirement goal? No debt. When others were throwing money at car payments, I was driving a beater and banking the money. When my friends moved out of their starter homes and traded up to McMansions, I stayed put in my adequate house and banked the money. When we got raises, we banked most of them and continued to live on less than we earned. When my friends went on four resort vacations a year, I went camping or visited family. When others were putting in stainless steel appliances and granite countertops, I stuck with the basic laminate counters and white appliances and banked the money. I’ve upgraded my lifestyle over the years, but very slowly. I don’t want to be retired and living in a crummy nursing home with only memories of fabulous granite countertops to make me feel better. I’d rather have that money for my care.

It’s not too late to do something about your retirement situation. Pay off all your debt and you’ll be amazed at how much cash you can suddenly throw at your future while still having some fun today. All those monthly payments can become contributions to your 401K or IRA. Debt holds your money hostage. Sure, you might be having fun now, but is it going to be fun in thirty years when you’re living in an assisted living facility and at the mercy of Medicaid? No one else can pay for your retirement and if you want to be comfortable and happy, you’re going to have to come up with a lot of money. Being debt free is the best way to get there.

How I Make Money Sitting Around

August 1, 2009 By Guest Writer 8 Comments

By Linda D.

I’m able to sock away an average of $700 a month by sitting around. I wish I could say that I was bright enough to have come up with the way to sit and earn money, but the reality is that it kind of fell into my lap. This is what happened.

A friend was going away on short notice for a funeral and told me how she really didn’t want to put her two dogs in the kennel, but had no other choice. When she mentioned the cost for the two dogs was going to be $60 a day, I said more as a joke than seriously that I would stay at her house with the dogs for that. Her response was completely serious when she said that she would be thrilled to pay me if I would.

Her reasoning was simple. The dogs were familiar with the house and there would be no stress of being left alone in a strange environment for a long period of time. Their daily routine wouldn’t be interrupted and she knew that they would get their familiar food and daily walk. In addition, she would have someone living in the house while gone to pick up mail and newspapers so that it wasn’t a target for thieves. She would get all this for the same price she would have had to pay anyway.

The gig worked out well and she told a number of her dog owner friends about me. Over time the number of requests has built enough that I now have to turn away business.

I’m in a fortunate situation that allows me to house and pet sit for others. My main job is as a sales rep where I do most of my work home. As long as the house has an Internet connection which I can use, I can do all of my work there just as easily as I could from my own apartment. This allows me to earn an extra $50 – $75 a day doing exactly what I would be doing at my own apartment — sitting down and working.

I understand that not everyone will have the flexibility in their schedule that I do to earn extra money, but I think that if you look for opportunities beyond your current main source of income that can compliment what you are already doing, you have a great opportunity to earn extra income. My retirement fund has gone from $0 to nearly $10,000 in the little more than a year and has been entirely funded by sitting around other people’s houses.

Do you have a story about saving money or earning money that you’d like to share? We’d love to hear about it.

A Life Without Debt: Whatever Will I Do In My Old Age?

May 19, 2009 By Sadie Morris 29 Comments

A couple of weeks ago I wrote about our decision to remain child-free and how that decision (while not based on money) has made it easier for us to remain out of debt. Several respondents wondered who would take care of me in my old age if I didn’t have kids. Wasn’t I giving up security in my old age by choosing not to have kids who could look after me?

The answer to that question is this: I will take care of myself in my old age and that is, at least partly, why remaining debt free is so important to me. It allows me to save large amounts of money to put toward my future care. Since I know that I will “have no one to look after me,” I have to make certain that I have adequate funds, insurance contracts, and legal protection in place to ensure that I am cared for in a manner that suits me, in the event that I am unable to do so myself. All of that requires large amounts of cash that would be eaten up if I had to make debt repayments.

Of course, even if I had kids I would not expect them to take care of me. Things happen in life. A kid might get a job offer in a far away state or even another country. Kids grow up and have families of their own that take precedence over caring for an aging parent. I would not expect or want a child to give up his or her dreams in order to take care of me. There is also the possibility that a child may not want to take care of an aging parent. Whether because the relationship is strained or the child simply isn’t responsible enough to shoulder the burden, I certainly would never count on a child to be my security net. I’ve seen too many people who thought their kids would be there for them, only to find out that life got in the way and the kids either had other responsibilities or zero interest in helping out. Having kids is no security net to make certain you are cared for in your old age. Even with kids, the only one who can be sure you’ll be cared for in your old age is you. It’s great if the kids want to help out, but to plan using that assumption is risky.

So how exactly does a child free person go about making sure they are cared for later? As I said, remaining debt free is critical. Because we have no debt we’ve managed to amass a nest egg of over a million dollars already. Since we live very low to the ground and spend only on thing that we really value, we have a lot of extra cash to work with. We save most of our raises and “bonus” income.

We stash the maximum allowable into 401K’s and IRA’s in order to take advantage of the tax breaks. We have several other investment accounts that are for mid-range and longer term goals. We’re putting money away in a separate, low risk account that is designated for health needs in our retirement. Yes, our 401K’s will cover some of those expenses, but the way medical costs are rising and Social Security and Medicare are declining, I’m planning as though I will need to buy my medical insurance myself, or pay for everything out of pocket. It’s a scary thought because I know how expensive that will be. But I’d rather be over-prepared than unable to meet my basic health needs.

I also make certain I have up to date wills, trusts, insurance policies, and other legal documents that clearly spell out my wishes as to how I want to be cared for and how I want any remaining assets to be distributed upon my death. These documents ensure that I receive the care I want, from the organizations and individuals that I trust, not just from whomever the state decides to send me to. If I can’t make any decisions for myself, it is all clearly spelled out in my legal documents. Since I have no kids to speak for me, I have to speak for myself and it has meant spending a decent sum of money on lawyers. I don’t like it, but even if I had kids it would still be something that I would have to do. I wouldn’t be able to trust that my kids would be available to speak for me, or that they would “get it right.” Emotions are funny things and I wouldn’t want a kid to have to decide whether or not to pull the plug. Even if you have kids you need to make certain that your wishes are clearly spelled out in legal documents.

We don’t save only for our old age; there are some things that we spend on now and that we save for in the near future. However, about fifty-percent of our money goes to preparing for our old age. The truth is that most people my age aren’t saving nearly enough, hoping instead that the government or their own kids will save them. So instead of preparing for old age, they’re buying bigger cars and houses and nice clothes instead of stashing that money. I’m planning to take care of myself, completely on my own. It will be nice if I get money from Medicare or Social security. Then I can use some of my money for fun stuff. But I can’t bet on it. I don’t feel like I can afford to direct any of my money to debt payments because I know I will need it later. And a lot of it. And if I end up over-prepared and die with a fortune left over? Then some charities are going to have a very nice windfall coming their way.

Kids are not an insurance policy. Even if I had them I would be taking the exact same steps to deal with my care. Remaining debt free and saving the resulting cash, whether with or without kids, is one of the most powerful wealth building tools available to see you through your old age.

Compound Interest – Personal Finance Fundamentals

September 7, 2008 By Jordan Lugar 27 Comments

I grew up hearing my dad say “Most people don’t know how money works.” He is a Certified Financial Planner, and while there were a few drawbacks growing up the son of a financial planner (no Gameboy or frivolous purchases unless we had saved up for them in advance), it also had huge advantages. Hearing that rich people knew something about how money worked that normal people didn’t know was naturally intriguing to me as a youth.

One of the first lessons I learned was what my dad referred to as “the miracle of compound interest.” With compound interest, opposed to simple interest, you earn interest not only on the initial investment (principal), but on the principal plus interest received to date. Because the principal balance increases with each interest payment received, the amount of interest earned each period also increases.. The longer the money is left in the investment to grow, the greater the value of the return each year.

Well, that sounds nice, but isn’t the point of investing to make money? Didn’t we all anticipate the savings to grow? Can you think of anyone who would intentionally invest their money to lose it? To help illustrate the power of compound interest, my dad gave me an example where a college student at age 20 invested $2,000 at a 6% average rate of return and never touched the money until retirement. He told me that at age 68, the account balance would be $32,000. As my financial knowledge was still in its infancy when I heard this lesson for the first time, I found it exciting that the initial investment of $2,000 could grow by $30,000 over time. I didn’t know how to calculate percent change, but it wasn’t necessary to know this was a 1,500% increase in order to recognize the significance of the growth.

In the next part of the lesson, my dad asked me what I thought would happen to the ending balance if we doubled the interest rate in the example to 12% and left everything else unchanged. I thought to myself, “what an easy question — if the interest rate doubles, the ending balance will double,” and answered that the ending balance would be $64,000. He told me that this was a good guess and that was what most people would guess, or they might add a little extra for the compounding. However, he said that most people never knew how much extra to add to the $64,000 to account for the compounding. He said that rarely had anyone ever guessed that the ending balance would be over $100,000. I thought it was preposterous that he even mentioned the six-figure number; this had to be way too high.

At this point, my dad taught me a simple formula in finance known as The Rule of 72. This formula is used to determine how long it will take for an investment to double at a given interest rate. The formula works by dividing 72 by the rate of return (72/Rate of Return % = Number of years to double). Using this formula, I realized that doubling the interest rate will not double the initial investment, but will cut the time it takes for the investment to double in half.

Returning to the question he had posed, I was astonished to find that the ending balance was not only greater than $100,000, or even $200,000, but was over a half a million dollars. I just couldn’t believe it; an investment could grow from $2,000 to over $500,000. It’s not like we were talking about letting the investment grow for eternity; on the contrary, I could experience this financial growth in my lifetime.

What this lesson teaches is that to fully maximize the potential returns from compound interest, we need to

1) start saving as early as possible to allow there to be more time for the interest to work its magic and

2) strive to obtain as great a rate of return as possible within our risk tolerance levels.

Compound interest is truly miraculous. Going back to our example one final time, given an additional 6 years at the 12% interest rate, the balance of the account would be worth over one million dollars. There is no question why Albert Einstein called compound interest “the eighth wonder of the world.”

Image courtesy of orangeacid

Passive vs Active Income: Are You Working For the Wrong Income?

August 31, 2008 By Joe Morgan 7 Comments

As children, we are often taught by our parents to do well in school, go to college and get a good job to succeed financially in life? We have all heard that being active and hard work will make us healthy and wealthy. But being an active participant isn’t always good for your financial health.

Think about it – Do you want to work 40+ hours a week for the rest of your working life? Chances are you have spent most of your working life working for the wrong kind of income. I’m talking about Passive vs. Active income, and which is right for you.

Active Income

This is the kind of income most people are working for, unless they were born into wealth or won the lottery. This is the income you derive as tips and wages from your job. It may be in the form of product sales on eBay or providing a service as a dog walker or being employed in a more traditional vocation. It’s likely your salary or your hourly wage in the form of a paycheck. If you have any doubts as to whether a given income is active, just ask yourself: If I don’t do the work, will I get paid? If the answer is no, it’s active income.

Passive Income

Passive income is derived from a source that requires no work to generate the payment. This kind of income has historically come from investments in dividend paying stocks, interest in savings accounts or bonds, or renting real estate. The key is that it takes no work to generate the income – once income is being generated. It still takes a lot of effort to start the ball rolling.

Which is the right kind of income?

Both types of income require hard work, and both types are essential for most of us. The difference is that once the work is done for the passive income, one need not do the work again to receive the income. That’s why attaining a passive income should be a goal, and your active income should be the means by which you attain that goal. Think of it as the fuel to power your trip to a passive lifestyle.

Anyone can attain a passive income, the question is how soon do you want it?

Typically the big payoffs come from the hardest work and the biggest risk of failure. Think of the starving artist or musician before he hits it big. He sacrifices much early on, but can often retire early.

If you don’t want to, or can’t, accept the risk then you can take the tried and true retirement nest-egg path. Retirement account like 401(k)’s and IRA’s are all about building an investment portfolio that will one day provide enough passive income to replace your paycheck completely. That’s retirement, and it takes a lifetime of active income to achieve it.

The sooner you can cultivate a successful passive income stream, the better off you will be. To this end, you should be using as much of your active income as you can to create these passive income streams. If you’re in debt or want to accelerate your path toward passive income, consider taking a second job and using that income to pay down your debt, or build up your income streams quicker.

The Possibilities

The information age has opened up other avenues to the ordinary person that were previously available to only a select few. Royalties are a good example of this. Before the Internet, you had to work extremely hard on a book or record or some similar product, then you had to be lucky enough to find a publisher or distributor. Then you had to wait for marketing to do its thing and hope it was successful enough to generate significant income for you after paying all the middle men.

The Internet has opened up the royalties piece of the passive income pie like never before. Ebooks only require personal publishing software, a computer and a blog. Throw in some gorilla marketing or affiliate programs and you can generate some sizable income. Speaking of blogs, if you’re successful in generating a lot of traffic to your blog, then Google adsense can help turn your blog into a passive income source.

Investing is another good example. There is a mountain of free information on the Internet about investing, and discount brokers make it possible for the average person to build a portfolio of dividend paying stocks and bonds without ever leaving their home.

If you’re a technophile who’s got some programming skill and an idea for a killer app, then software can easily become a passive income stream. Once you’ve got the product, it costs close to nothing to set up a paypal system and a download link.

Passive income doesn’t have to be from the stodgy old school of investments, or the up and coming new technology. Some sources of passive income are strikingly bland and unexciting. ATM’s and vending machines can fit this category. While they do require some upkeep, it’s not as much effort for the income as your standard 40 hour job.

In the end, you’re looking at two basic methods to passive income: An entrepreneurial approach, or an investment approach. Which one is right for you depends on your interest, desire and inclination. The important thing is to start thinking about being more passive in your income, and more active in your life.

If you want to read more about building your financial health, check out these articles;

How to buy an oil well
Raise your credit score by 200 points
Take the 52 week money challenge and save a ton

Image courtesy of jef safi (dis-territorialized)

Reached Financial Independence. Now What?

August 11, 2008 By Jennifer Derrick 12 Comments

I have a friend who has reached financial independence at the relatively young age of thirty-eight. He is completely debt free, having paid off his modest mortgage several years ago and owing nothing else. He has enough money invested to live quite comfortably, if modestly, from the earnings those investments produce. In other words, he no longer has to work to make a living. (If you want to learn more about financial independence and how it can be accomplished, I highly recommend the book, “Your Money Or Your Life” by Joe Dominguez and Vicki Robin.)

I’ve never considered him wealthy; he’s not a trust fund baby or a dot-com millionaire. He didn’t inherit millions. He does make a good income, but it’s not exorbitant for the area in which we live. He reached financial independence the old fashioned way. He works hard. He never buys things he can’t afford. He lives very low to the ground and stashes all the extra money in high-yield investments and savings accounts. Having been friends with this man since college, I can attest that he did nothing more than live significantly below his means for the last twenty years. At times he worked multiple jobs to pay the bills and still have some left over to save.

I can hear some people saying, “Well, that’s fine but he’s deprived himself all these years when he could have been living a better life.” Maybe, maybe not. He could have spent more money, certainly, but would it have bought him the happiness he has being debt free and free from work? I doubt it. He’s always had fun doing things that are cheap or free and I’ve never once heard him complain that he can’t have or do something. He made a decision years ago that he would achieve financial independence and he’s worked toward that goal. Even if most of us wouldn’t choose that path, it’s certainly admirable that he made a financial plan and stuck to it. That in itself is rare these days. And most of us would love to have his freedom, we’re just not willing to sacrifice in the short term to achieve a long term goal. Harsh, but true.

Anyway, the other day I was sitting on the porch with my friend having a beer and he told me he’d just quit his job that day. I wasn’t too surprised because I knew he wasn’t thrilled with the situation and, now that he had reached financial independence, he didn’t need to work there anymore. But I wondered what he would do now. He’s not the sort of person who will be content with a life of leisure for long. He has to be doing something or he goes nuts. So I asked him, “What are you going to do now?”

His answer surprised me. I thought he would say travel the world or work on the house. Maybe work part time. Something easy. Nope, not this guy.

“I’m going to volunteer full time.”

“Volunteer for what?” I asked.

“Whatever groups need me and I feel like I can help at the time.”

Now, this is a man who is in a position to simply donate money to organizations that he wants to help and leave it at that. But instead of the easy way, he’s choosing to actually give his time. And not easy desk job stuff.

I asked him what groups he was considering working for and he named off a few. Habitat for Humanity, some local conservation and environmental groups, some local literacy groups, and, my favorite, teaching some classes on finance at the local community college that serves the underprivileged areas of the city. He’s going to be building houses, cleaning rivers and roadsides, and teaching. This is not a life of leisure.

He said that he’d start off working for several organizations and then see if he wanted to specialize or keep working for whoever needed him. He’s exploring opportunities in other states and countries as well, so he can combine some travel with his volunteer work. He said he’d probably take some part time paid work in his field, as well, to keep him from having to touch his saving too much and to stay involved in his industry. “Just in case,” he added with a shrug.

I sat there drinking my beer and thinking how astounding this man is. I was exhausted just listening to his plans. How many of us (be honest), if we found ourselves in his situation, would choose this harder path? Wouldn’t most of us choose to indulge our travel habit, or work part time and spend the rest of the time in leisure pursuits, chasing golf balls around the green? There’s nothing wrong with that: When you’ve earned the money, you’ve earned the right to do with it what you will. But to choose to work for those less fortunate and, even better, to teach others the skills that earned you your money and your freedom, well, that’s something special.

I asked him why he made that choice. He said that he simply felt it was fair. He had so much energy, time and talent that it wasn’t fair to waste it on the golf course or let it atrophy by doing nothing. He felt like volunteering would give him what he needed to be happy: Contact with other people, a chance to make a difference, a chance to use his talents in the pursuit of something greater than money, exercise, time outside, and a chance to teach others some of what he knew. He said that he recognized that most organizations are short on people who can give a lot of time, are young enough to give physical labor instead of just money, and who are motivated to see something through, rather than just racking up hours to satisfy a community service requirement. He met those criteria and decided to give what he had: time, energy, and ability.

“Besides,” he said, “I’m never sure what these organizations do with my money when I give it to them. At least I know for sure what my labor is doing to help.”

“Wow,” was all I could say.

In the end, my friend gave me a lot to think about. Should I ever find myself in his position (and I’m actively working to get there by my mid/late-40’s), what will I do? Will I also do something that matters or will I waste my time and talents doing trivial things? I hadn’t really thought about it until I spoke to my friend. To be honest, my wishes to this point have been pretty selfish and not very well thought out. I always figured I’d work part time, but I have no idea doing what. I want to travel extensively, I want to pursue a lot of hobbies that get neglected, I want to be more social. I want, I want, I want. There’s nothing wrong with satisfying some of my wants, but now my friend has me thinking: Is that going to be enough? I doubt it.

What my friend opened my eyes to is this: We spend so much of our lives trying to get money, to achieve financial comfort or independence, and for what, exactly? So we can buy more stuff? So we can sit around all day and do nothing? That’s fine if it satisfies you, but I doubt it will be fulfilling for long. Assuming you remain in good health, you’ll probably want more. It’s a question worth considering. If you’re ever fortunate enough to reach the point where work is optional, what will you do? Will you keep working in your field, or will you try something new? Will you work part time or full time? Will you give something back?

I know I will spend the next few years looking for volunteer and part time opportunities that combine my interests and hobbies with the chance to do something meaningful. Volunteering can be a great way to remain active and involved in life, to combine your interests and hobbies with the chance to give something back, and to acknowledge your gratitude for your position in life. Or, as my friend says, it’s simply fair.

Image courtesy of Brandon Cirillo