Should You Care About Retirement in Your 20s?

Saving for Retirement in Your 20s

When you’re young, it may seem like you have your entire life ahead of you to accomplish any financial goals you may have. After all, your student loans are on a 10 year repayment term, retirement is 30 to 40 years away (that’s longer than you’ve been alive!), and you have plans to live it up now that you’re earning a decent income.

It’s easy to buy into the whole “you only live once” attitude, but is that the right way to approach your financial situation?

It may appear to be the easier way, but it won’t do your future self any favors if you ignore your savings for now. You should absolutely care about your retirement in your 20s.

What Does Retirement Look Like for You?

It might be tough to visualize what you want your retirement to look like. For many people, images of sipping a cocktail on the beach come to mind. Others might want to travel around the world, spend time with family, volunteer, learn new skills, or simply relax and enjoy a hobby or two.

Whatever your retirement looks like, the reality is it’ll cost money. Money that you need to save.

You might think Social Security will pull through and help you out. While no one can predict the future of Social Security, it’s not a good idea to assume you’ll be able to live off of those benefits alone in retirement. Make sure your retirement ends up the way you want it to by taking control of the situation. Make saving a priority.

Retirement Shouldn’t Be a Struggle

Chances are you know someone struggling to afford retirement. Whether that means they’re delaying retirement because they don’t have enough saved, or they had to return to the workforce after retiring because their monthly income wasn’t enough to pay for their expenses, you don’t want to encounter any financial troubles when you retire.

You want to enjoy your golden years after putting in your time at work, right? Why make it harder on yourself?

If you’re familiar with living paycheck to paycheck, or living like a broke college student, just imagine doing it all over again when you’re in your 50s or 60s. That doesn’t sound too appealing, does it? But it’s the unfortunate reality many folks are living because they didn’t prepare appropriately for early retirement.

Take this recent study by the U.S. Government Accountability Office. The first part of their findings is, “Many retirees and workers approaching retirement have limited financial resources. About half of households age 55 and older have no retirement savings (such as in a 401(k) plan or an IRA).”

You don’t have to end up in that situation if you act today.

Why Saving Early is Important

There are so many people who start saving late in the game who won’t be able to live their ideal retirement because they didn’t have enough time to amass the savings needed. With life expectancy on the rise, you’re looking at saving around 30 years’ worth of living expenses

That means if you’re able to live off of $35,000 per year, you’ll need $1,050,000 to retire (that’s not including other things you might need to fund in retirement, like health care expenses). It sounds like a big sum — and it is! But the good news is the sooner you start, the easier it will be.

Before we get into the how, let’s explain with an example highlighting the power of compound interest. The earlier you start to save, the more time your money has to compound year over year.

Let’s say you start with putting $2,500 in your retirement account. Each month, for 30 years, you contribute another $150 to your account. Assuming a conservative interest rate of 6%, you’ll end up with a balance of $156,663.46.

However, that’s not accounting for the fact you’ll likely receive raises as you grow in your career. You’ll be able to contribute more in the future. For example, if you manage to save $30,000, and contribute $300 each month for 20 years at a 6% interest rate, you’ll have $228,642.19.

In contrast, if you have the same $30,000 balance, but only have 10 years to save, contributing $300 at a 6% interest rate gives you $101,176.29. That’s a difference of $127,465.90.

That’s powerful, and it’s proof that waiting can affect how much you’re able to save in a big way.

How You Can Save for Retirement

There are no shortage of ways you can save for retirement.

Employer-Sponsored Plan: This includes plans like 401(k)s, 403(b)s, etc. These plans are offered directly through your employer and are tax-deferred. That means the amount you contribute is deducted from your income. Besides investing for your future, you’re lowering the amount of income you’re taxed on!

Employer-sponsored plans often involve matching contributions, which can help you save even more. Say your employer matches 100% of the first 6% of your gross salary. If you make $45,000 per year, 6% is $2,700. All you have to do is contribute $2,700 to your 401(k), and your employer will do so as well. That’s free money.

IRA: You can choose to open a Roth IRA or a Traditional IRA if your employer doesn’t offer a 401(k). You can still contribute to an IRA if you’re contributing to a 401(k), though. Traditional IRAs offer tax-deferred growth, whereas Roth IRAs offer tax-free growth.

Self-Employed Plans: If you’re an entrepreneur, you have plenty of investment options as well. We go over the most common options in this post.

Don’t Base Your Plans on Things That Aren’t Guaranteed

The worst thing you can do is put off saving for retirement because you think something else will come to the rescue. Whether that’s Social Security, a pension, an inheritance, or your family helping you out, circumstances and policies can always change.

It’s safer to save for retirement the “hard way” by being responsible. If something else does come through, think of it as icing on the cake. By saving on your own, you can be confident in your ability to retire. That’s priceless.

A Musical Money-Guy Mashup

Muscial Money Guy Mashup

We’re bringing back one of our favorite episodes of the podcast this week. Ready for a blast from the past?

Brian got an email from a listener who talked about how timeless the book, The Millionaire Next Door is — even though the Money Guys been talking about it for the last decade. It reminded Brian of a show he put together way back in September, 2013. He took the 7 principles in Dr. Thomas Stanley’s book and matched them up with songs and lyrics.

Everyone is in for a treat this week as we explore the way music relates to your finances. If you want more information about any of the songs or artists here, be sure to check out www.rapgenius.com. This site was like a black hole, there’s tons of artist and song information. There is also a bunch of information about record deals and behind the scenes workings of being an artist.

And visit Dr. Stanley’s blog at www.thomasjstanley.com to further dig into The Millionaire Next Door.

Millionaire Next Door Concept #1: “Live Well Below Your Means”

The concept of deferred gratification is the cornerstone to financial success. Dave Ramsey often says, “If you will live like no one else, later you can live like no one else.” Brian found three songs that tie into this concept — two are about living below your means and one is about being broke all the time. Let’s start with the bad concept of living paycheck to paycheck.

Millionaire Next Door Concept #2: “Allocate Time, Energy, and Money Efficiently”

To be successful you have to be a good investor and allocate your resources wisely. We always reference being “hyper-savers” when you can stash away 15-20% of your income.

Millionaire Next Door Concept #3: “Financial Independence Is More Important Than Displaying High Social Status”

Sometimes we prematurely celebrate our financial success by rewarding ourselves with bigger houses, cars, and lifestyle. This can make your life more complex and stretch you to the point that financial independence disappears because you spend all of your resources keeping up and taking care of your expensive lifestyle. There have been a number of songs that have discussed this issue:

Millionaire Next Door Concepts #4 & #5

Here’s what these two concepts say:

“Their parents did not provide economic outpatient care” and “Their adult children are economically self-sufficient.” Economic outpatient care refers to parents that are still providing for adult children who should be caring for themselves independently.

This song is depressing, but details the importance of spending time with your children and helping them grow because life moves very quickly.

Millionaire Next Door Concept #6: “Become Proficient in Targeting Market Opportunities”

We’re constantly talking about building your savings and investments to a point that you have created an army of dollar bills that work for you. That way you don’t have to use your brain, hands, or back.

Millionaire Next Door Concept #7: “Choose the Right Occupation”

This is one of the most important concepts to grasp.

And a Money-Guy bonus: Make sure you marry the right partner. There are more songs than we can shake a stick at about the wrong type of relationships. Brian did list two songs that are good ones to help with this point of advice:

 

How to Financially Prepare for a Job Loss

FInancially Prepare for Job Loss

No one likes to think about the possibility of becoming unemployed, but you can never be too safe when it comes to preparing for financial emergencies. Worrying over how you’re going to pay the bills or stay out of debt is never fun. 

Whether or not you think you’ll be facing a period of unemployment in the future, it always pays to be prepared. Especially if you do know you’ll be laid off soon, or if your company is undergoing changes.

Learning how to financially prepare for a job loss means less stress if the time ever comes. Here are a few ways you can safeguard your money against the loss of income. 

The Most Obvious: Have an Emergency Fund 

We’re going to cover the most obvious solution first: having an emergency fund ready to go. An unforeseen job loss certainly qualifies as an emergency, and that’s why we recommend having 3 t0 6 months’ worth of living expenses saved. 

Depending on the industry you’re in or what type of work you do, you may need more or less. For example, freelancers and entrepreneurs who have a volatile income — rather than a steady paycheck — may want to put away more in a rainy day fund. But don’t get tripped up over how much you “should have.” It’s more important to simply start!

If you’re a Money-Guy Show listener, we’re fairly sure you’re already on the ball with this, but we couldn’t not mention it.

Have More Than One Source of Income

As the saying goes, don’t put all your eggs in one basket. Diversifying isn’t exclusive to investing. It applies to your income, too. If your only source of income is from your day job, consider finding new and novel ways to make a little extra on the side.

How can you diversify your income? Are there any small side jobs you can dedicate spare time to? If you’re an expert in your field, consulting may be a good choice (as long as it doesn’t interfere with your day job right now). You could also try freelancing if a hobby of yours is able to be monetized. 

Create a Bare-Bones Budget 

Besides having your emergency fund ready, you should also create a budget that contains only the bare necessities. In the event of a job loss, it’s worth going into ultra-frugal mode (if you can).

That means any luxuries you treat yourself are gone. Cable, manicures/pedicures, hair appointments, dining out, a gym membership — they all qualify. Go through your current expenses and evaluate them one-by-one. Ask yourself if they’re essential to your survival. If they’re not, don’t include them in your bare-bones budget. 

The purpose of creating a bare-bones budget before a job loss is to know exactly what your monthly expenses would be in a dire financial situation. If you want to earn money on the side to cover your expenses, it helps to have a number to aim for.

If you’re married and your spouse also earns an income, hopefully their salary will be enough to cover your bare expenses. Speaking of which… 

Practice Living Off of One Income

If you’re currently living off of two incomes, and think you may be facing a job loss soon, it’s worth practicing living off of one income. Get that bare-bones budget prepared, and then make it a point to see how difficult or easy it is to live according to it.

It’s normal to have adjusted to a certain lifestyle after earning a decent amount, but when your income decreases, you need to be able to adjust back.

Is living off of one income too hard? Try living off of 50% of your combined income. The point is to get used to living on less. Pretending like you’ve already lost that income can help prepare you for the transition. 

Evaluate Your Insurance

Your paycheck isn’t the only thing you lose with your job. You lose any insurance offered through your employer, too. 

Don’t skip considering this issue this even if you’re enrolled through your spouse’s insurance. You should both be equally prepared for a job loss, regardless of who’s in a more stable situation.

It’s important to know the options available to you through a marketplace plan, or through your spouse (if you’re married). Going without insurance, even just for a few months, isn’t a wise idea. Plus, you’ll have to pay fees for each month you’re uninsured come tax time. 

Know What Happens to Your 401(k) 

Have you been contributing regularly to your employer-sponsored retirement plan? It’s imperative you know what will happen to it if you’re laid off. You should ask your plan manager what your employer’s guidelines are so you’re crystal clear on the matter. 

Typically, you can either leave it be and let your former employer keep the account open for you; roll it over into a new 401(k) at your next job; roll it over into an IRA; or, cash it out (which you really shouldn’t do).

It Pays to Be Prepared

No one knows what the future holds, and everyone is replaceable. Whether you’re a contract worker, a full or part time employee, or a business owner, your income isn’t guaranteed. Fortifying your finances to withstand a job loss is crucial to avoid the stress and emotional drains that come with being unemployed.

Having your money in order actually gives you a semblance of freedom, too. You won’t feel like you have to take the first job that comes your way just for the paycheck. The lack of pressure allows you to take your time to search for an opportunity that excites you. This ensures you’ll end up happy in your next position, rather than resentful.

How to Avoid Cognitive Investing Biases on the Road to Financial Independence

Cognitive Investment Biases

In celebration of Independence Day, your Money Guys are talking about how our emotions can interfere with achieving financial independence.

We all know that being invested in the stock market puts our money at risk, which can cause a roller coaster of emotions at times. When the market is up, we’re happy, and when it’s down, we’re depressed and anxious.

Letting your emotions influence your financial decisions, especially when it comes to your investments, is a bad idea. How can we push our emotions aside so they don’t cause us to make grave mistakes with our portfolio?

Brian and Bo give you the answers in this episode, and discuss 15 cognitive investing biases to avoid on the road to financial independence.

Don’t Let Your Brain Hold You Back When it Comes to Money

Rick Edelman’s book, “The Truth About Money,” reviews the cognitive biases investors are most at risk for, and Brian goes through each in detail. He provides insightful examples so you can recognize when your emotions might be controlling your investment decisions.

The first step in being able to avoid these biases is to simply be aware of them. All too often, we get caught up in our thoughts and rationality goes out the window. You don’t want to play around with your emotions or your money, especially when it comes to growing your wealth to reach financial independence.

Here are 15 cognitive biases to stay away from as an investor.

 

  • Intuition Bias: Do you rely on your gut to make investment decisions? It goes without saying that’s a big mistake!
  • Mental Accounting Bias: This is when we treat our money differently depending on where we’ve mentally allocated it.
  • Compartmentalizing Bias: If you have multiple investment accounts, are you factoring in the investments you’re holding in all of them when figuring out what to invest in? Or are you viewing each as a separate account? You shouldn’t compartmentalize your investments.
  • Pattern Recognition Bias: Many of us are guilty of seeking out patterns that don’t exist. This is why “past performance does not guarantee future results” exists.
  • Recency Bias: We have a tendency to focus on current events, and this might cause us to base future predictions on how the present is going.
  • Proud Papa Bias: This occurs when we fall in love with our investments, or when we have a personal interest in seeing a stock do well.
  • Optimism Bias: This is when we think bad things only happen to others – not us – which causes us to be overconfident in our investments and to underestimate risks.
  • Illusion of Control Bias: If you think your actions control events, you’re guilty of this one. Just because you purchase a stock doesn’t mean it will perform well.
  • Pessimism Bias: The opposite of optimism bias, this is when we second-guess all of our investment decisions and can’t take action.
  • Catastrophe Bias: A combination of the recency and pessimism biases, this occurs when we think another recession is just around the corner, and hold ourselves back from entering the market because of that belief.
  • Regret Aversion Bias: Have you ever made such a bad mistake, you take every measure you can to avoid making it again? This limits your opportunity, especially with your money.
  • Endowment Bias: This is when you overinflate the value of your investments, similar to how homeowners often think their home is worth more than it actually is.
  • Herd Mentality Bias: So many investors are guilty of going with the herd on investments, whether it’s with friends, coworkers, or the media.
  • Anchor Bias: This can happen when the price of a stock shoots up or down, and an investor makes a decision to buy based on what the previous and current price is. They’re not valuing the price correctly because they’re anchoring to the higher price.
  • Illusion of Attention Bias: This is prone to happening when you invest in individual stocks, and focus all your attention on how they’re performing. This distracts you from the total performance of your portfolio.

In short, don’t fall prey to your emotions. They won’t guide you to road that leads to financial independence. Instead, base your investment decisions on sound principles, thoroughly research your options, make use of reputable resources, consult with your financial advisor, and don’t forget to enjoy life along the way.

Money is a tool to accomplish what you want in life, but don’t let the market influence your emotions to the point of being miserable.