Retirement Advice from an Expert (NOT Me)

I read an article today that rocked my world and I want to share it with my vast audience of literally TENS of readers. 

If you’re like me, you want to retire as early as possible.  It doesn’t matter how much I enjoy my job; there will always be a long list of other things I’d rather be doing.  Planning for retirement is intimidating, and I always feel like I’m not as far along as I should be.  My goal, and it’s a bit of a stretch, is to semi-retire at 55.  By “semi-retire”, I mean I would be perfectly content to work for, say, ten years in a low paying, low stress, part time job that helps supplement my income.  Then, at around age 65, I’d like to embrace full retirement, devoting 100% of my time to my worthy hobbies, which include traveling, drinking wine, and napping, among other things. 

*Side note:  In a perfect world, I would embrace full retirement at age 55 and earn supplemental income from passive sources like rental properties.  We’ll see how that plays out.  Thinking about how to create passive income streams is an intimidating and confusing topic for another day.

Retirement planning seems a bit simpler today after reading an interview with investment advisor William Bernstein on the CNNMoney blog.  Mr. Bernstein has managed to make retirement planning seem a lot less like rocket science and a lot more like common sense.  I’m not even going to try to summarize the main points here because I don’t think I could possibly be as clear and concise as Mr. Bernstein is in his own words.  Just click through and read the interview.

Viva la frugal!

Kickin’ Worry to the Curb

When I began living frugally and writing this blog, I really had only one goal: to live comfortably and never worry about money.  Anything more specific than that – building an emergency fund, paying off my HELOC, saving for retirement, etc. – was really just a tactic to achieve the overall goal of financial freedom and comfort. 

I thought that I would achieve this goal sometime in the very distant future.  I imagined that there would be some tangible measure or trigger that would let me know that I could finally stop worrying about money.  Maybe it would be paying off a mortgage and owning a home outright, or maybe it would be reaching a $1 million balance in my retirement accounts.  Whatever “it” was, I mentally prepared myself to wait a good 20+ years before I felt confident enough to say, “I no longer worry about money.”

In actuality, it took only 12 months to reach that point.

Now, don’t get me wrong… I certainly did not achieve any exceptional financial milestones in that time.  I didn’t generate an impressive investment portfolio, and I didn’t pay off my mortgage.  But after 12 months, I did have a focused goal, discipline, and enough progress to feel confident and excited about my financial future.  As it turns out, that’s all I really needed to stop worrying about money.

It’s probably important to clarify what I mean when I speak of worrying about money.  To me, worry is what I feel when I’m scared or insecure.  I worried about money when I asked myself these types of questions:  Am I going to be able to pay my full credit card balance this month?  If my house needs a major unexpected repair, how am I going to pay for it?  If I become really miserable in my job, can I afford to look for another one?  Am I going to have enough money to retire at a reasonable age?

When I worried about money, I didn’t have answers to these questions.  All it took to rid myself of worry was to have good, solid answers:

Q:  Am I going to be able to pay my full credit card balance this month?

A:  Of course.  My spending has been within budget so I’ll have the cash to pay the bill.

 

Q:  If my house needs a major unexpected repair, how am I going to pay for it?

A:  From my emergency savings fund. 

 

Q:  If I become really miserable in my job, can I afford to look for another one?

A:  If I ever feel miserable because I’m being put in a position that violates my personal or professional ethics, I can afford to resign and live off of emergency savings while I look for another job.  (Note: This is obviously an extreme situation, and not one I have ever been in or expect to be in.  But it’s very good for my peace of mind to know that I can afford to get out of a seriously bad situation.  If I simply didn’t like my job, I would probably never quit unless I already had another one in the bag.)

 

Q:  Am I going to have enough money to retire at a reasonable age?

A:  Yes.  I am contributing to my 401(k) aggressively and when I calculate my compounded return over the next 30 years, I can see that I’ll be in great shape. 

 

It was really important to realize that I could stop worrying about money simply by having a plan and sticking to it.  I’ve definitely lacked discipline in my spending over the last couple of months since I bought my new house, but I know I can get back on track.  In a way, getting off track has been good for me…  I absolutely love my new house and the things I’ve bought for it, but I hate feeling the financial worry creep back into my life.  This has been a good reminder that I love independence and financial freedom more than I’ll ever love things, even beautiful things that make my house look amazing.

The past couple of months have been a financial hiccup for me, but I’m going to take it in stride.  I’m going to use the worry that I feel to reinforce the importance of my long term goals.  There’s no reason why I can’t be worry-free again in a few months, and that’s something I will work toward with focus and confidence.

Viva la Frugal!

Save, baby, Save!

I’m pleased to announce that I have a buyer for my house and we will be closing at the end of June!  The terms of sale have been negotiated and agreed upon, so nothing should go wrong between now and closing.  That means it’s time to start making plans for the money I’ll be getting after the sale.

Yep, I am one of the lucky few who have been able to sell a house in this market and make a small profit.  It was great luck that I bought my house in 2004 before the market went crazy and housing prices shot up.  Even though the bubble has burst and prices have fallen, they are still a bit above what I paid.  After my mortgage and HELOC are paid off and the closing costs are covered, I should clear about $12,000.

I don’t plan to spend any of that money, but I still feel like a kid at Christmas!  When the sale goes through, I am going to have the $24,000 emergency fund I’ve been working so hard to accumulate.  By the end of June, I will have grown my emergency savings to $12,000.  I’ll add the $12,000 from the sale and be done.  Why am I so excited about that?  Because it means that all of the savings I do from that point on will be for something much more rewarding than a cash cushion I can never touch. 

I plan to go right on saving like a fiend.  I will open a Roth IRA with the next $5,000 I save, which is the maximum allowable annual contribution (to learn more about IRAs, check out RothIRA.com).  I’ve always contributed to my 401(k) at work, but this feels like the first time I’ll be taking really proactive steps to achieve my goal of early retirement.  It’s a great feeling. 

A sidebar on the wonders of compounding:

There’s a great tool at Moneychimp.com that allows you to calculate the value of an investment that compounds over time.  Withdrawals from a Roth IRA are allowed at age 59½.  I am currently 30½ years old.  That means I can make 30 annual contributions and earn compounding returns for 29 years before I’m eligible to make withdrawals.  I plan to contribute the maximum amount allowed each year, which is $5,000. 

I’m assuming that I will achieve a 5% rate of return.  This is conservative, but I want to err on the side of caution.  Also, I’m a little more risk averse than many people when it comes to investing.   I’m likely to switch to lower risk / lower return funds earlier than most people would. 

I entered all of these variables into the calculator at Moneychimp and it revealed that my IRA will be worth approximately $347,775 when I’m eligible to begin making withdrawals at age 59½.  My total investment of $150,000 will generate $197,775 in earnings over 29 years.  Sweet!

But since I occasionally like to torture myself with regrets…  I used the calculator to see how much money I would have if I had contributed $5,000 per year beginning at age 22 when I started working.  By age 59½, my IRA would have been worth $563,955.  My total investment of $190,000 would have generated $373,955 in earnings.  By spending money throughout my twenties on a bunch of crap I didn’t need, I basically threw away $176,000.  Aaaarrrrggghh!! 

Lesson learned:  When you have the opportunity to earn compounding returns, invest as much as you can as early as you can!

 

After this year’s IRA contribution is covered, savings from that point on will go toward the purchase of a new car and a new house.  I have to say, those savings goals are a little daunting…  Actually, they’re a lot daunting.  I’m going to need around $20,000 to purchase a reliable but modest new car when the time comes (probably in five or six years if I can stand to wait that long).  I’ll need another $50,000 in order to purchase a $225,000 home with a 20% down payment and enough cash to cover closing costs.  So basically, my next savings goal is $70,000.  VERY daunting. 

But I’m not going to freeze like a deer caught in the headlights of my savings goals.  As always, I’m going to maintain my motivation by focusing on the big picture and by feeling proud of what I’ve accomplished so far.  The truth is, I should be able to achieve my new savings goals within six years (while still making my annual IRA contributions).  In the grand scheme of things, six years isn’t that long.  At 36 years old, I will be in great financial shape.  It’s difficult to predict what my financial goals and priorities will be in six years, but I love knowing that I will have options.