Sunday, September 14, 2014

What 40 Years of Saving, Investing and Spending Wisely Will Do for Us

It's hard for our future self to convince today's self to save, invest and spend our money wisely, because taking care of the future requires the exercise of good judgment and patience from today's self.

All things considered, however, it's the only smart and reasonable thing to do. So let's consider some basic, simple and smart things that will help us prepare for and enjoy 'oldsterhood' --- and which will make us feel better and more comfortable about living through adulthood as well.

With the writer's tongue firmly planted in cheekHow to Throw Away a Fortune is subtitled 'Smart Moves to Neglect and Stupid Ones to Make:'

"Today's topic: How to throw away a fortune—in seven easy steps. Ready to waste money? Here are some surefire strategies:

1. Delay saving.

Suppose you work for 40 years, save $250 a month, your investments earn a 5% pretax annual return and you lose 25% a year to income taxes.

If you start saving as soon as you enter the workforce, you will have roughly $279,000 at retirement. But if you delay by just 10 years, you'll amass $167,000, or 40% less.
2. Shun retirement accounts.

OK, maybe it's worth saving for 40 years. But is it really worth locking up money in retirement accounts, with a 10% tax penalty to discourage withdrawals before age 59½?

Let's use the assumptions above. But suppose you skip the taxable account and instead fund a Roth individual retirement account, which can deliver tax-free growth. After 40 years, you'd have $383,000, with no taxes owed.

What if, instead, you had opted for a tax-deductible IRA? You might lose 25% to taxes when you cash out your IRA in retirement. But if you'd invested the tax savings from the initial tax deduction, you could sock away $333 every month, rather than $250. Result: After taxes, the tax-deductible IRA should give you $383,000, just like the Roth.

3. Forfeit the employer match.

Roughly 20% of eligible employees don't salt away money in 401(k) plans, including plans with matching employer contributions, according to a survey by Chicago's Plan Sponsor Council of America.

Are you among those who don't contribute—or don't contribute enough to get the full match? You could be missing out on a heap of dough.

Let's assume your employer matches 401(k) contributions at a rate of 50 cents for every $1 you contribute. If you saved $333 a month for 40 years and collected the match, you'd have $575,000 at retirement, even after paying all taxes.

4. Buy active mutual funds.

We've been assuming a 5% annual investment return. But what if you buy actively managed mutual funds, rather than market-tracking index funds? Sure, you might enjoy the occasional market-beating year—but it is highly unlikely you would earn market-beating returns over 40 years.

A more likely scenario: You lag behind the market, perhaps by one percentage point a year, so you earn just 4%. Suppose you funded the 401(k) with the match for 40 years. At 4%, you'd have $445,000 after taxes, or 23% less than with the 5% return we assumed above.

5. Carry a credit-card balance.

In 2014's second quarter, the average credit-card debt per borrower was $5,234, according to TransUnion, the Chicago-based credit bureau. Imagine you kept your card balance at that level, but incurred 20% in total annual interest costs. That would be almost $42,000 in interest over 40 years.

What if you hadn't paid that interest, and instead stashed the money in a Roth IRA, where it earned 5% a year? After 40 years, you would have another $133,000 for retirement.

6. Get a new car every three years.

Let's say you bought a $30,000 car. You might recoup 56% of the car's cost if you sold it after three years, which means you'd need to pony up another $13,200 to buy a new $30,000 car.

By contrast, if you kept the car for six years, you might recoup just 34%, so you would need to come up with $19,800 to buy a new $30,000 car. But because you're buying a new car less frequently, you'd spend $6,600 less every six years.

The potential cost savings are even greater if you drove the car for more than six years or, alternatively, bought a used car. True, you might incur somewhat higher repair bills by driving an older vehicle. But you would also save on insurance, which should be cheaper for a less valuable car.

7. Remodel your home.

Think that new kitchen will be a great investment? Check out Remodeling magazine's survey at According to the 2014 survey, a major kitchen remodeling might cost $54,909, but add just $40,732 to a home's resale value. The survey found that other home-improvement projects were also money losers. Moreover, the longer you wait to sell, the shabbier your renovations will look and the less you'll likely recoup.

I have nothing against home improvements. But you should undertake them because they will give you a lot of pleasure—and not because you think they're a good investment."

Summing Up

What we do with our earnings with respect to saving, investing and spending matters a great deal to our future self's economic health and well being.

And getting to oldster status is already hard enough with plenty of hurdles and hardships along the way. Let's not make the end of the journey harder.

So let's teach our current self to take better care of our future self.

And let's all encourage our younger friends to use common sense and good judgment with respect to how they spend their biggest asset -- their time.

We'll be glad we did, and so will they.

That's my take.

Thanks. Bob.

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