1. Start Investing Early or Start Now
What a confusing mess.
Whether you are 25 or 45, you are probably getting this message from hearing political bickering over Social Security, chatter at work, or conversations with friends or relatives: You need to figure out how to save more and invest right for retirement so you don’t end up living a dreary life in a broken-down hovel when you are 70.
Yet responding is daunting. The recession of 2008 might have destroyed a good chunk of your savings and left you insecure about your future and investing. You probably have a job that takes too much of your time, family and friends vying for your attention, a need to have a little fun and more sleep, loans to pay, and a paycheck that is already stretched to the limit. In short, you are like most Americans: stressed out about time and money.
So maybe you look for a quick fix: Perhaps you turn to a friend, coworker, neighbor, or spouse, thinking that person must understand the mystery behind the befuddling process of investing better than you. Maybe you defer to that person, sticking your money where he or she says to put it or second-guessing yourself.
But you could end up like Lorraine, the 72-year-old woman who called me for a way out of her job at a Minneapolis dry cleaner a few years ago. Despite failing health, she couldn’t quit because she had turned to a coworker for advice on her $120,000 in savings. She had done exactly what he suggested and put the full $120,000 into a mutual fund that had made him a lot of money. Unfortunately, like most Americans, he knew little about investing. The mutual fund he recommended turned out to be a disaster. Lorraine lost all but $55,000 in a few months, and if she had responded to her aching back and knees and retired at that point, she wouldn’t have had enough to cover rent, food, and medicine each month. She could count on only about $1,000 a month from Social Security and not even $400 a month from her savings.
At 72, Lorraine’s mistake was a devastating one that would keep her toiling at the dry-cleaning business for years longer. But people of all ages commit similar errors when they follow their friends and coworkers—or even worse procrastinate.
If you have been procrastinating, you are the norm, not the exception. Over the years, I have heard from thousands of people like you. You might be afraid of making a mistake with your money. You probably promise yourself that when you have more time or more money, you will figure out the 401(k) retirement plan at work or sort out all the TV blather and hype about IRAs, mutual funds, and the stock market.
But if you follow the usual pattern, the extra money never materializes. If you are like today’s average college graduate, you start life sickened by the $25,000 in college loans overshadowing your future. You are figuring out your job, or hoping to find the right one. You tell yourself that you’ll have plenty of time for retirement saving later and that making sense of the confusing 401(k) plan at work can wait another day.
Then come car payments. And time passes. There’s still no money left just before payday, and you are so busy you can hardly think. Next, your first home and mortgage payments arrive, maybe along with kids. Soon you are buying Adidas and PlayStations, helping with homework, and rushing from work to parent–teacher conferences at school. And the kids’ college years get closer and closer, with nothing stashed away to pay for any of it.
That’s why you need to start saving small amounts for retirement now and, if you’ve already begun, to invest smarter now so that each penny counts. What you do matters. And saving early matters greatly: It saves you from the heavy lifting you will need to do if you wait. Here’s the illustration often tossed about in training seminars for financial planners:
Imagine twins at age 21. One twin decides to start stashing away money. She opens a Roth IRA, a magical moneymaking tool I explain in Chapter 3, “Savings on Steroids: Use a 401(k) and an IRA.”
She puts $3,000 into that Roth IRA retirement savings account at age 21, invests it in the stock market, and adds another $3,000 each year for the next five years. After age 26, she never puts any new money into that account. As the years go by, her money grows an average of 10 percent a year in the stock market. And when she retires at the end of her 65th year, she has more than $1 million, or roughly $1,048,000.
Now consider her sister, who decides at age 21 that she has plenty of time left to save. She waits to start until she is age 30. Then she invests $3,000 in the same mutual fund her sister has been using for years. Every single year until the day she retires, she diligently invests another $3,000.
Despite that determination, she never catches up to her sister. The twin who waited until she was 30 ends up with only about $987,000, about $61,000 less than the sister who became an investor at age 21. And to amass that smaller amount, the 30-year-old put aside a total of $108,000 of her own money, or $3,000 year after year. Contrast that to the sister who started at 21. She took only $18,000 out of her pocket during six years; then not another penny, and yet she ended up with more than $1 million.
Let’s look at this another way: Assume that you want to have $1 million when you retire at the end of your 67th year. If you start investing at age 20, you will have to put only about $20 a week into a mutual fund to get there if you earn an average of 10 percent a year. In other words, you would invest roughly $1,050 a year and earn approximately what the stock market has historically provided investors.
But if you wait until you are age 25 to start, you’ll need to invest about $33 a week, or roughly $1,700 a year, to get to $1 million. If you are 35 when you start, you will have to save about $87 a week, or approximately $4,500 a year. And if you are 45 and haven’t saved a dime, you will have to stash away about $245 or $12,750 a year, to get to the same point at retirement that a 20-year-old does by investing only $20 a week. You can try this yourself on an Internet calculator like Millionaire Calculator, at www.timevalue.com/products/tcalc-financial-calculators/millionaire-calculator.aspx, or the Compounding Calculator, at www.moneychimp.com. (Keep in mind as you use various calculators that each rounds numbers and makes assumptions about timing; outcomes will vary somewhat. Seek a ballpark idea instead of expecting a precise number.)
The moral of this story: Start investing early because your early savings magically transform nickels and dimes into thousands of dollars. You might think you are making a sacrifice to save when you are young, but you are actually making life easier on yourself later.
On the other hand, if those early days have already passed you by, don’t think saving is futile. Starting now still puts you way ahead of where you would be if you waited ten years or even a few more months. If you are 40 and start investing $50 a week sensibly now, you still could have about $300,000 when you retire. Is that a lot or a little? I’ll help you put that into perspective in the next chapter.
The key is to start now because today’s money will get you much further than next month’s.
Feeling Incompetent
Let me assure you; if you doubt your capability to invest wisely, you are not alone. In a Harris poll of people who were investing in stocks, bonds, and mutual funds, only 2 percent said they felt like they knew everything they needed to know to make their investment decisions. Eighty-two percent wished their financial advisers would do more to educate them so they could make better investments.
If you were investing in a 401(k) or IRA at the beginning of 2000, you are probably still wondering where half of your hard-earned money went then, what you did wrong, and how to fix it so that it never happens again. If you regained most of your money after that miserable period and then got slapped again by the 2008 financial crisis, you might be wondering whether investing is a losers’ game that you can’t possibly win. The bruising blows of two of the worst stock market crashes in history probably eroded what little confidence you had.
This book removes the confusion and helps you put your good intentions into action that works. Saving merely $20 to $50 a week now can rather easily set you up for a $1 million retirement if you start when you’re young, understand my simple lessons on the stock market and mutual funds, and use retirement accounts that give your money the best boost possible.
I don’t thrust theory and tips at you and send you away to struggle with this later. I tell you where to go to get the best investment deals and how to buy what you need to buy. I provide models that you can easily copy. There’s no “just trust me” to this book; you learn why you are doing what I’m telling you to do. That will give you the confidence to proceed through life even when the stock market seems scary. Anyone who has graduated from high school has the innate ability to grasp and do what I suggest.
Shared Ignorance
If Lorraine’s story didn’t make you cautious about trusting another person with your money, maybe this one will show you that you are part of a large club of people who are all in the dark about handling their money.
A couple years ago, I got a call from a 25-year-old who had just graduated from business school. He wanted to know the names of good index mutual funds and where to find them. In Chapter 13, “Index Funds: Get What You Pay For,” I tell you more about these funds because they are an excellent, and easy, investment choice. But for now, I merely want you to focus on this 25-year-old business school graduate.
He’d learned in business school that an index fund was a smart way to invest. But that was it. He still had no idea how to put the concept to work. So he called me for advice.
“Where do I find the best index fund, and how much money do I need to get started?” he asked.
I ran his question in my column, along with tips for him, and it caused quite a stir among my readers. Because his question was so elementary, some of my readers were sure that either the question was a phony or the young man had attended a rotten university.
Neither was true. And I tell you the story now, as I told it then, for one reason: A person can be educated in business, run a business, be brilliant in math, and read the business pages in newspapers, and still lack practical tools for investing, such as where to find a good mutual fund.
So before you turn over your investing decisions to a friend or spouse, think twice about your own capabilities. As a columnist, I constantly hear from perfectly capable people with valid questions. Still, they believe they are unusually ignorant. They almost always start their calls to me with a confession: “I don’t know what I’m doing.” Many assume they lack some innate ability. But it just isn’t true. The language of the financial world simply makes people feel incompetent, and the stock market unsettles people because it appears to work in mysterious ways.
Yet you should know that few people have an edge over you. A stunning number of multimillionaires and successful businessmen ask me to review their investments because they aren’t sure whether their broker has led them astray.
Keep this in mind: The person you think is so advanced compared to you might simply appear more confident or more educated. He or she might simply be more willing to jump into the task of investing money. But you can do it, too—and maybe better than a financial adviser—if you merely follow the steps I lay out for you.
If you learned addition, subtraction, multiplication, and division in grade school, you have more math than you will probably need. And the Internet calculators I suggest will do the work for you. Eventually, you will be able to eye your 401(k) account or an IRA and quickly pick mutual funds with the ease you would in following a recipe. And you will feel comfortable that you won’t live like a pauper now or when you retire.
Get Real
People are great at deluding themselves and telling themselves that everything will work out when it really won’t.
A few years ago, Towers Perrin surveyed people within 10 years of retiring. Among those who had saved nothing, 58 percent not only were confident that they would have everything they needed in retirement, but expected to be able to take trips and buy luxuries, too. This delusional thinking gives new meaning to the term American Dream. We are a nation of optimists, but this takes it a bit too far.
Don’t fool yourself. If you don’t save, Social Security alone won’t do it for you, even if the system lasts instead of crumbling the way some analysts are predicting. You won’t be buying luxuries. You will be wondering how you will pay for electricity and heat your home or apartment. According to a survey of seniors done by AARP, half of retirees worry they won’t be able to pay their utility bills in the next few months.
And it’s no wonder. About half of seniors now depend on Social Security to cover at least 50 percent of their living expenses. And the average senior gets about $1,200 in Social Security a month.
So let’s get real. Think of your lifestyle now and how you’d handle it if you were living on just $1,200 a month.
But let’s take this a step further. Imagine that you are positioned like half of Americans who are 10 years away from retirement: You have $103,200 or less saved for retirement. (That’s what the Congressional Research Service found in a study.) What would $103,200 give you? About $345 a month for living expenses. Add that to the average Social Security payment of $1,200, and you would have $1,545 to live on each month.
Oh, and one more thing: People often think Medicare will cover all their health needs during retirement. But that’s not true. The average retired couple has to pay about $330 a month for extra health insurance because Medicare pays only part of what people need, according to the Medicare Payment Advisory Commission. And then there are prescription drugs. Remember, older people aren’t usually as fit as younger people.
Perhaps you’ve heard that a new Medicare program provides free drug coverage. But that’s not true, either. It helps pay for drugs. Even with the new coverage, the ordinary retiree must spend about $790 a year for prescriptions, according to a Congressional Budget Office estimate.
So now look at a monthly income of about $1,150 after paying for medical insurance and medicine.
Could you handle it?