Timeline For Retirement Planning

If I were to ask you if a sixteen-year-old should open a Roth IRA, would you agree? As long as that teenager is earning an income and living with mom and dad, I would highly recommend him or her to open a Roth. Imagine if that teenager learned the value of compound interest and the power of time value of money. These two components of financial stewardship are so important that teaching your son or daughter early that doing so will position him or her for a comfortable retirement. That is why every time I am asked this question, I always answer “Now is never too early to start. So, let me give you the question and follow it with my recommendation.

How early should I begin planning for my retirement?

The easy answer to this complicated question is that as soon as you ask the question, you should begin planning. If you are wondering when you should start, then that is a good indication that you are seriously thinking about retirement. There are so many demands on a young person’s financial resources that retirement planning to a young person is “something that old people do.” However, retirement planning is not something that should wait. From the day a person enters the workforce, he or she has access to one of the greatest wealth building resources in the world; an income. The next best wealth building resource is the company sponsored 401k or 403b plan.

Retirement planning should begin the moment a person has access to a company sponsored retirement plan. With the death of the traditional pension, employees are assuming more responsibility for their retirement and with Social Security on life support, this trend will continue. This is why more companies are beginning to institute the automatic contribution program for their employees. According to a report produced by the United States Department of Labor, approximately 30 percent of eligible workers do not participate in their employer’s 401(k)-type plan. An automatic enrollment 401k plan will reduce this number significantly.

Some might ask “What is the benefit of an automatic enrollment 401k plan?” Well, let’s look at the concept and examine the benefits. First, an automatic enrollment plan increases plan participation among both rank-and-file employees and also among managers who might overlook the benefits of a 401k. Surprisingly, managers who qualify for a 401k don’t take full advantage of the plan. A company match is a kin to giving yourself a tax-deferred pay raise. Even contributions made above the company match simulates a pay raise since ever dollar contributed reduces your taxable income.

Next, an automatic enrollment plan self-directs contributions if employees do not select their own investments. Typically, these self-directed contributions are placed in a targeted date fund, which is a fancy name for a mutual fund of mutual funds that are weighted based on the projected retirement date. This feature helps those who are not market savvy have their money managed for them. As the retirement date approaches, the targeted date fund adjusts to reduce risk. This feature can also simplify the selection of investments appropriate for long-term retirement savings for participants.

Finally, these types of programs help employees begin saving for their future and take advantage of favorable tax treatment. Some companies are also offering the Roth 401k which takes advantage of tax free growth. The Roth 401k is a great way for a young person to build significant amounts of wealth without having the government eventually impact the growth.

Now, to get back to the heart of the question of when should someone begin to plan for retirement. Honestly, sixteen is not too early to begin to plan for retirement. Doing this will pay tremendous rewards later on in life. Some might question the wisdom of planning so early, but keep this in mind. Life will try, and in many cases succeed, at interrupting your plan. Therefore, the more time you have built into your plan, the greater number of interruptions your plan can withstand. When you begin to save for retirement with ten years to go, a significant financial event will have a greater impact on your retirement planning.

It is not too early to find an area where you would like to retire and purchase some land there. If you have the ability to purchase land (meaning you have the financial resources to pay cash) and you can find the right location, purchase it now. If you decide later to live somewhere else, you can always resell the land. Retirement planning isn’t just financial in the sense that it is all about money. You have to consider where you would like to live, what activities you want to do, and if there are any special services you need.

Analytics can be your friend. Knowing what you want out of your retirement will identify what you need to put into your retirement planning. One thing I can say with confidence is that I have never met someone who said “I want to be dependent in my retirement.” We all want a level of independence and freedom to do the things we never had time to do while we had to work. Having no plan is having a plan to be dependent. With that said, here is the time line I suggest for saving for retirement.

When you begin to earn an income in your teens and early twenties and you don’t have significant expenses, start a Roth IRA. Someone in his or her teens to early twenties, who can put away $2,000 a year for eight years has the potential to have $25,736 with a 10.5% return at age 22. If that person never adds another dollar to the account, he or she could have over $4 million at full retirement age. Therefore, I suggest that anyone in this age group start the engine of wealth building as soon as he or she can. It only takes $2,000 a year for eight years.

As you transition from the academic environment to the working world (between 22 and 30) participate in a company sponsored retirement plan. Here you can shift from contributing to your Roth IRA to your 401k. If you have the resources to do both, then by all means, continue to do both, but the main focus should be on contributing to your 401k up to the company match. This should always be a part of your wealth building plan so long as you are gainfully employed.

As you enter the child rearing years (30 to 55), continue to increase your 401k contributions to the maximum IRS limit of $18,000 per year. In addition to this, max out your Roth each year by contributing the $6,500 IRS limit. This is the goal. If you cannot reach the limits, contribute as much as your income and expenses allow. Keeping expenses low means you can keep your contributions high.

Once your children are grown and raising families of their own, you can begin to transition to full retirement planning. By this I mean you can max everything out. Fund 401k contributions and catch-up contributions to the maximum and do the same for your Roth IRAs. The last 15 employment years should be the most lucrative contribution years of your life. Granted, these contributions will see the least amount of growth, but you can benefit from the tax-treatment in your high earning years.

The process is simple. Start with as much as you can afford in the early years. Adjust for family needs in the middle years. Close with the greatest amount of contributions you can in the final years. The truth is that you should be planning for your retirement from the day you begin to earn taxable income. By doing this, you will have no need to depend on social security even though you will still be eligible for it. Be your own security. Imagine being able to collect social security and donate it to your favorite non-profit and write it off your taxes when you have to take the MRD from your IRA.

You can learn more about how to build a powerful retirement strategy by purchasing Simple Wealth Building Strategies or 10 Ways To Improve Your Retirement Planning. 

When You Become Yourself In Another Body

After writing my book, Simple Wealth Building Strategies, I had the eye opening experience of having my identity stolen. Thank God I had taken my own advice and implemented the strategy I wrote about in Chapter 4. Sometimes the wisest thing you can do is take the advice you’d give to others. That is what saved me from wasting a lot of time and energy cleaning up a financial mess. In Chapter 4, I discussed the best way to protect your wealth by taking a defensive posture. I started the chapter on wealth preservation by writing these words. Contrary to the popular phrase “the best defense is a strong offense,” you have to employ a different strategy that says the best offense is a great defense. To build wealth, you need an income (offense), but to preserve it you need strategies (defense).”

There is a lot of information in that chapter focused on helping the reader preserve the wealth he or she is building, but there is nothing more important than the information about identity theft. As a matter of fact, I called the strategy to combat identity theft “The Greatest Wealth Preservation Tool” because protecting yourself from identity theft is the single most important thing you can do in today’s world. I believe this strategy is so important that I have decided to give you an excerpt from the book so you can protect yourself from identity thieves. If you find this information helpful, consider picking up a copy of Simple Wealth Building Strategies to learn more about building wealth. I hope this excerpt helps you protect your financial assets when you become yourself in another body.

Up to this point, I have been discussing those things over which you have direct control. You have an emergency fund to cover unexpected expenses and a sinking fund to cover expected expenses in the future. That is why I highly recommend that you identify these two items (the emergency and sinking funds) as Obligations so you make them the highest of priorities. Over these items you have control. However, there are items within the Wealth Preservation strategy over which you have limited control. Therefore, it is important to seek out the best process for increasing your level of influence over these areas where you lack control. One of the most important Wealth Preservation actions you can take is protecting your identity from theft. In this section, I will walk you through a simple, but effective strategy that anyone with a credit history can do. There are three credit reporting agencies that capture and report data associated with your use of credit. Most every purveyor of credit contacts these three agencies before extending credit to a potential borrower. There are several options you have that will offer you different levels of confidence and comfort concerning identity theft. Most companies such as LifeLock, LegalShield, and IdenityGuard offer credit monitoring and restoration services. It is important to note that these services do not guarantee that your identity will not be stolen. They only guarantee that they will notify you when it happens and they will assist you in restoring your identity.

When your identity is stolen, a thief can open credit accounts in your name. The use of your credit card number is not identity theft. That is merely fraud. The concern with identity theft is that someone, pretending to be you, establishes new credit accounts in your name and then proceeds to max out each account before you have a chance to prove that you did not establish these accounts. According to the Federal Trade Commission (FTC) the average time required to recover from one instance of identity theft is six months and 200 hours of work. The FTC qualifies this estimate by noting that most of the actual work of identity theft recovery (i.e. phone calls, written correspondence, keeping track of creditors, responding to letters, working with credit bureaus and law enforcement agencies, etc.) involves the victims making sure that they won't be liable for the debts that thieves created.

So, though you may feel a certain level of comfort knowing that one of the credit monitoring services is watching your accounts, you should not have an over-inflated sense of confidence that your identity will not be stolen. It is important to note that credit monitoring does not actually stop the opening of new accounts. It can enable you to learn about the fraudulent accounts sooner, but it does not stop identity theft. Each service requires an ongoing financial commitment (usually a monthly fee) to maintain services. I first began this journey of identity theft protection by paying over $100 for myself and another $100 for my wife. We switched identity theft protection companies when we learned that we could have both identities protected for one low price of $154 annually, about $12.83 a month. However, having identity theft protection only kicks in once your identity is stolen. Think about it. The reason why these companies offer restoration services is because there is a need for restoration, which means your identity has been stolen.

Accessing the services of these companies provides some protection, but outside of making the monthly payment, you have little to no control over your credit. However, there is a way that you can protect your credit/identity and maintain almost total control over your credit for a very minimal cost. The best way to preserve wealth is to establish a Security Freeze at all credit reporting services. The process is easy and will not cost you hundreds of dollars a year. If you are concerned about becoming a victim of fraud or identity theft, a Security Freeze with the three credit reporting agencies might be right for you. Wealth Preservation is about more than how you handle money. It is also about managing your affairs in such a way that you protect your reputation, identity, and wealth. Placing a freeze on your credit report with TransUnion, Equifax, and Experian will prevent lenders and others from accessing your credit report entirely. This prevents them from extending credit to those who seek to use your identity for their fraudulent activities.

With a Security Freeze in place, even you will need to take special steps when you wish to apply for any type of credit. Due to more stringent security features, you will need to place a Security Freeze separately with each of the three major credit reporting companies in order to place a total freeze on all of your credit files. This Security Freeze remains on your credit file until you remove it or choose to lift it temporarily when applying for credit or credit-dependent services. You and your spouse will need to place a security freeze on your individual credit reports because your credit history is based on your social security number. Placing a protective freeze for a child can prevent fraudulent accounts from being opened with your child’s identity. If you are the parent/legal guardian of a minor or medically incapacitated consumer and reside in an eligible state, you may have the right to request a protected consumer freeze. The process to complete this action is simple, but profoundly important. To check the fees for your states, type the links below into your browser and follow the instructions.

Equifax:

https://help.equifax.com/app/answers/detail/a_id/75/search/1

TransUnion:

http://www.transunion.com/personal-credit/credit-disputes/creditfreezes.page?tab=freezefees

Experian:

http://www.experian.com/consumer/security_freeze.html

To complete this action in the Wealth Preservation strategy, go to each credit reporting agency and request a credit freeze. For TransUnion, type this link (https://www.transunion.com/freeze) into your browser address bar and follow the instructions. For Equifax, type this link (https://www.freeze.equifax.com/Freeze/jsp/SFF_PersonalIDInfo.jsp) into the address bar of your browser and complete the process. For Experian type this link (https://www.experian.com/freeze/center.html) into your browser’s address bar and complete the form. Make sure you retain the PIN numbers that you are assigned by each credit reporting agency because, in order to lift a ban or cancel it, you will need to provide each service with that number.

I believe this one action will give you the most comfort and confidence that your identity is safe. The most important safeguard in a Security Freeze is that if you want to spontaneously open a credit account to save ten percent instantly, you can’t. In a roundabout way, establishing a Security Freeze limits your exposure to easy credit, which in turn reduces your temptation to artificially inflate your income through the use of credit. That, in and of itself, is a Wealth Preservation benefit. If you have ever fallen victim to the pressure of signing up for a credit account in order to save an instant 10 percent on your purchase, you know how easy credit can destroy your wealth building plan. Establishing a Security Freeze protects you from identity theft and from yourself.

I hope this will help you protect your wealth when “you become yourself in another body.” If you would like to learn more about simple strategies that can help you build wealth, consider purchasing my book. I took the defensive action to put freezes on my credit and when my identity was stolen, the thief attempted to open six accounts in my name, but he or she couldn’t because the thief could not get approval from the credit reporting companies. Having a monitoring service can help repair the damage a credit thief can do, but why not stop him or her before the damage is done. Take it from someone who knows, being proactive will be the best thing you have ever done.

Five Financial Goals Everyone Should Have

It doesn’t matter if you are 16 or 60, when it comes to setting financial goals, it is imperative that you position yourself to take advantage of every opportunity. That means funding every tax favored account you can to the maximum amount allowed by law. What might surprise you is that the average income earner can do this with the correct strategy. Most people lack the ability to lay out a successful strategy when it comes to building wealth, so I have made it easy for you. If you follow the strategies outlined in my book, Simple Wealth Building Strategies, you WILL be able to achieve the following five financial goals.

The first financial goal everyone should have is to fully fund his or her employer sponsored 401k account to the maximum allowed by law. For a two income family, that simply means you will have two solid retirement plans. Current limits are $18K contribution limit and $6K catch-up contribution for those over age 50. If you are over age 50, then you need to take advantage of the catch-up contribution. For most incomes, achieving this goal will require thirty percent or more of your income. The table below shows two incomes and the required contribution amounts to successfully save the 401k limit amounts without and with catch up contributions.

The way to position yourself to accomplish this goal every year is to stay out of debt. But staying out of debt is not enough. You must also pay off your mortgage as fast as possible, otherwise you will not have the flexibility in your income to set aside thirty percent or more. When you are debt free and you do not have a mortgage, your entire financial world changes. I don’t want you to think that having this goal is only for rich people. I was talking to someone the other day who has been working since he was 16 years old and this year is the first year he will be able to max out his 401k. It has taken him just over 36 years to reach that point, but he is finally there. Think about how significant his achievement is. When he began working, 401k’s didn’t even exist, so he has only been working on this goal since the mid-1980s. If you want to read an interesting history on the advent of the 401k, click here.

The second financial goal everyone should have is much like the first. Set a goal to fully fund your individual Roth IRA accounts. I say accounts for those who are married. Even if you are a single income family such as mine, you must make it a priority to first fund the non-working spouses Roth IRA and then your own. Current limits are $5.5K per individual and $1K catch-up contributions for those over age 50. Once again, if you are over age 50, then you need to take advantage of the catch-up contribution. I recommend that the working spouse in a single income family funds the non-working spouse’s Roth IRA first because the working spouse will likely have access to an employer sponsored 401k plan that will be fully funded. The priority is first the 401k, then the non-working spouse’s Roth IRA and then the working spouse’s Roth IRA. If both people are working, then this goal is a lot easier, but even for the single or the single income family, there is a way to build a strategy to do this without impacting the family budget.

In today’s world of high health care costs and the disaster known as the “unaffordable care act,” families today need every advantage they can get. Even individuals need to take advantage of the Health Savings Account or HSA, as they are commonly called. Therefore, the third financial goal everyone should have is to fully fund the family’s HSA.  Current limits are $6.75K per family and $1K catch-up contributions for those over age 55. If you are over age 55, then you need to take advantage of the catch-up contribution. Don’t ever leave money on the table when you are in full blown wealth building mode. Some of you might be asking “How is a family supposed to afford all of this savings and investments on an average salary?” You have to develop the mentality that believes “Where salary leaves off, strategy takes over.” The following table shows that, with a little nest egg, one can use the growth of such to create an ulterior income that becomes the pump-primer for the well of wealth.

The more you can increase the brokerage account’s value, the lower the dividend yield you need to accomplish your goal. It is conceivable that you can get to the point where your money is making more for you than you make for yourself, but I’ll leave that for another discussion. This goal is a powerful one, but when you coupe it with the fourth goal, you have a wealth building engine that will blow you away.

The fourth financial goal everyone should have is to contribute the same percentage of his or her income towards the brokerage account that he or she needs to generate in returns to fund his or her Roth IRA’s and HSA. In the first example, the income earner must generate an 8.88 percent return to fully fund the Roth IRA’s and the HSA. Now imagine if the income earner could put an additional 8.88 percent of his or her income into the brokerage account. Funding the accounts mentioned would be a lot easier. The key is to use a portion of your current income as the inorganic seed in concert with your brokerage account to fully fund your Roth IRA’s and HSA. It is not uncommon to find someone who uses this strategy contributing 30 percent of his income to his 401k and 11 percent of his income to his brokerage account. Maxing out your 401k and seeding your brokerage with inorganic growth can go a long way to achieving these five financial goals.

The fifth financial goal everyone should have is to increase cash reserves. These cash reserves are not held in a traditional savings account. This is money you hold in actual cash. The best way to increase this cash reserve is to identify Passive Revenue Streams (PRS). Passive Revenue Streams are sources of income that are non-traditional and income that is generated without requiring a considerable amount of time or energy. The one rule about passive income that you absolutely must obey is this. Passive Revenue should never cost you financially. It is passive, meaning that it should not require a lot of time and energy and it is revenue, meaning that it is an asset, not a liability. 

Passive revenue increases your wealth, it does not deplete it. You must be creative with this goal.

Turn a hobby into a passive revenue stream. I like to write, so I write books and self-publish. Since the publishing is on demand, I only pay a small amount of the royalties towards the costs of publishing, but nothing out of pocket to make my books available. Once I have written the book and self-published it, there is no more effort required. Book royalties are truly a passive revenue stream. The key to this goal is to take the passive revenue and set it aside in cash. This provides you with a quick source of funds when you need a small amount of money and cannot get to the bank. Keep the amount of cash you keep on hand reasonable. You don’t want to have tens of thousands of dollars on hand unless you are expecting a major emergency. 

I titled this message “Five Financial Goals Everyone Should Have” because I believe that everyone can have these goals. It is just a matter of will. You should have them, you can have them, but the questions is, do you WANT to have them? I can tell you that when you do have them and you are succeeding at achieving them, you will experience life from a different perspective. While others are panicking about their future, you will be in a totally different place. A calm place. A place that feels peaceful rather than stressful.

As a financial stability life coach, I help others develop strategies that build wealth. Everyone’s situation is different. Therefore, I do not believe in a cookie-cutter approach to helping others build wealth. You have to incorporate a fair amount of longitude and latitude in every strategy. Having margin allows you to capitalize on opportunity that appears when you have a greater amount of stability. If you are interested in what a financial stability life coach can do for you, click here.