Monday, January 30, 2012

My Retirement Planning

Perhaps one of the toughest perceived minefields to navigate is the topic of retirement planning. There’s a wide range of questions ranging from how much will I need to will I have to work until they have to carry my dead body out of the building? Then there’s the vehicles, 401ks, company matches, Iras and everything else that’s under the sun. There’s an endless and dizzying array of options, formulas, theories and suggestions that financial goobers and all our broke advisors recommend and advise.

Here’s my two cents, which is not theory or ideas. These are the practices that I have and am implementing in my life.

Before you Fund

When I began my ascent over my mountain of debt I was faced with two daunting and scary challenges. (1) Use up all of my pathetic and anorexic savings, leaving $1,000 to pay off debt to get my snowball rolling, and (2) suspend all retirement contributions while I worked my debt snowball. This meant, *GULP* missing out on my 401(k) match, which at the time was 100% up to 6% of contributions. Now while the match was sweet and gave me immediate return on my money, there were bigger and stronger forces at work here. By giving sold out and focused gazelle intensity for a short period of time, I attacked my debt snowball with unbridled fury and within the same year I was debt free and able to go right back to steady and strong contributions for retirement without feeling a pinch.

A disclaimer here though, if you are working your debt snowball and your forecast takes you beyond a few years to climb out; I DO NOT ADVISE STOPPING RETIREMENT CONTRIBUTIONS. If  you’ve got a big ticket debt item that’s not a mortgage, like student loan debt or something you can’t sell and be rid of, then I would advise to give sold out and focused intensity on everything up to that item. Go gazelle intense and when you reach that big ticket item on the debt snowball list, raise up your emergency fund to fully funded (3-6 months of expenses) and pick up retirement contributions (8-12% of your income). Gear up for that long haul but in the mean time, sell everything that’s not bolted down, trim your budget and get creative. There’s tons of really creative and cool things you can do to pump up income and/or keep your costs down, heck, I became a flexatarian!

The 15% Rule

Once you’re debt free from everything (but the house) and have a fully funded emergency fund, it’s time to build some wealth J! The tactic I use is contributing 15% of my gross income to retirement vehicles every year and all the time. Up to this point we busted up American Excess, kicked Sallie Mae to the curb and have one or none monthly payments due to debt. Why get rid of monthly loan payments? Because our single greatest wealth building tool is our income, period. When you free up your monthly income and no longer have debt payments, contributing 15% of your gross income to retirement will be second nature.

I start with my company retirement plan. In some cases, a company will match your contributions up to a certain percentage. This is free money, take it. Go all the way up to the match and the remaining amount needed for 15%, go ahead and funnel into a Roth IRA, do not include the company match in your 15% formula, you’ll thank me later when you have extra money to give away J!

In a recent change of events, my employer is no longer offering a company match. But since I can still contribute pre-tax income to the company retirement plan, I am putting 4% of my pre-tax income into my 401(k) and invest that money into a bond fund (my equity options stink) so that way in the long-term, my hard earned dollars can at least keep pace with inflation and I can access a little tax savings from current year to current year. So that leaves me with 11% left to allocate. I funnel this amount into a Roth IRA and invest in four types of mutual funds with long-term and proven historical track records (at least 10 years old with average annualized returns of over 12% since inception): Growth, Growth & Income, International and Aggressive Growth.

I do not use target dated funds. These guys run a ratio of holdings between equities and bonds, and shift towards bonds as the target date gets closer. So while the target dated fund does a little better with inflation for the person who plays it safe, over time the four type of funds I recommend will average 12% average annualized returns and kick inflation and taxes to the moon and back, all the while target-dated people wanted safety? The fact is that bonds are not the safe investment vehicle that advisors have touted them to be. You know how I feel about debt in general, (yes, bonds are debt instruments), but left in a long-term investment, especially over 30 years, you will cheat yourself valued growth by “playing it safe” against investing for value in time tested and historically proven mutual funds.

So let’s take a look at a real life example, mine.

Taken straight from the wonderful investing calculator tool at, I’ve inputted a starting amount of our current household balance within retirement accounts, as of the end of 2011. If all things hold true, we maintain our current salaries and continue to put away 15% of gross income for retirement and our mutual funds maintain average annualized returns of 12%, over 30 years, with the power of compound interest, we will have over $5 million dollars JUST IN RETIREMENT ACCOUNTS. What if I’m half wrong, still not half bad wouldn’t you say?!

Traditional vs. Roth

Tax savings is the ultimate catalyst for the Roth/Traditional debate. But breakdown of which you should use should be simple. Let’s look at my case study (of myself). Say, for 30 years I contribute 15% of pre-tax income to a Traditional IRA. Per the chart I would have total contributions north of $400,000. All 30 years I would have been able to deduct that money from my annual tax bill. Now when “MANDATORY WITHDRAWALS” occur due to rules and regulations from our fine friends in D.C, I will be taxed on my growth at ordinary income rates. So, say I am forced to withdraw 4% of my nest egg in my first year of mandatory withdrawals, this would be an annual withdrawal of $207,612 that would be taxed (as of today) north of 35%, translated, the KGB US Government will steal $72,000 of my nest egg every year because I was responsible and saved for retirement through a Traditional IRA.

Now say you invest all of that money into a Roth IRA. Yes, the 30 year contributions of $400,000 would have been taxed along the way. But the growth of over $4 million dollars can be withdrawn (say it with me class) TAX-FREEEEEE! The argument essentially boils down to this: If your mandatory retirement withdrawals put you in a higher tax bracket than now – use a Roth IRA. If you do not have as much time to build and accumulate wealth and mandatory annual withdrawals put you at the same or lower annual income – use a Traditional IRA.

Look, I acknowledge that I exist in a world where pensions are a thing of the past and Social (In)security is in a pathetic state. I don’t need the KGB US Government to take of me. I need to take care of myself. By getting costs under control and investing in the long-term, I will retire with dignity. It is up to me to save, not my company or our inept government to do it for me, it’s strictly up to you and me to take care of ourselves


  1. You are half wrong. 12% interest annually is where Dave Ramsey is way off. Getting people to expect a 12% return on their portfolio evend during retirement when you should be getting more conservative with your investment choices is flat out wreckless. Insert 6-8% and your model looks much more realistic. That being said your retirement ideas look great either way.

  2. Yeah, 6% annual return more realistic. The US economy suffered two major bubbles and has massive debt with high unemployment. Now kids are graduating with massive college debt and will be paying down their loans instead of increasing consumer spending. The boom times are over.

    I spent the last six years throwing all my money into a Roth IRA, but I'm switching to a Traditional IRA since I have no 401k and qualify for the full deduction (more $$$ to invest). I also expect to be in a lower tax bracket, especially with my frugal lifestyle.