Are you financing your past or saving for your future?
It is often argued that there are “good” uses of debt. Yet many people are so burdened by it that they cannot afford to save for the future, which, of course, is not good. In many cases, debt is the hangover from decisions we made months or even years ago…
According to a 2010 National Institute on Retirement Security, the median retirement account balance for Americans aged 55-64 is…wait for it…drumroll please………….. $12,0001. Cue the depressing music. Sad as it may be to quantify this, I’m sure the fact comes as little surprise to many. But why is this? Can some not afford it? Sure. But for many, they just cease to make it a priority. We simply choose to spend our money on other, more immediate things. If that’s you, you may want to check out our recent post & video on cash-flow management. But I think there’s a much larger elephant in the room. Debt.
In researching for this post, I found no shortage of data on debt. Pretty much everyone agrees we (read “Americans”) have a debt problem. As of Q4 2015, the average American debt-carrying household has $15,762 in credit card debt, $27,141 in auto loans, $48,172 in student loans and a $168,614 mortgage.2 With so much debt and the payments that go along with it, it’s no wonder people can’t save for retirement. But we are not without hope! Having counseled hundreds of people through this very issue, I know that a little focus and discipline can go a long way. Let’s do this.
The first thing you need to do if you’re under a pile of debt is to get out from under it. In order to do that, you need to know what you spend and how much money you can commit to accelerating your debt payments. If you need help with that, refer to the link above on cash-flow management. Once you know how much extra money you can throw at your debt. It’s time for the debt snowball! So what’s this debt snowball? I’m glad you asked!
The debt snowball is the process of paying off your debts from smallest to largest. When you pay off one debt, you roll that payment into the next debt and so on and so forth and keep going until you’ve paid off all of your non-mortgage debt. So why do we start with the smallest debt and not the one with the highest interest rate? Because we’re humans and we need little victories. It takes people 18 to 36 months to get through this process. If we don’t see immediate fruits to our labor, many of us will give up. Would you save a little interest if you did it the other way? Maybe. But let’s be honest. If we were such disciplined mathematicians, we wouldn’t be in the situation in the first place would we?
Now if you’ve gone through the hard work of paying off all of your non-mortgage debt, I’m sure you don’t want to all back into it. First up, build a decent emergency fund. I’d say at least $10k. This is your insurance policy and serves to protect you from that unexpected set of tires, transmission, and trips to urgent care. DON’T SKIP THIS STEP! If you start saving for retirement before you have this in place, you’ll be taking a premature distribution at the first sign of trouble. But do it right and you’ll be saving money like a champ and on target for a prosperous retirement.
-Mike Macco
The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete. Any opinions are those of Michael Macco and Patrick Stoa and not necessarily those of Raymond James. Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website's users and/or members.
Is your house sabotaging your retirement?
When I talk with people about living within their means, we often hit on the surface issues: going out to eat too often or spending too much on clothes. But it takes courage on the part of the client to get to the deeper issues. Today we reveal long-term shifts in housing that could be damaging to your retirement.
Is your house sabotaging your retirement? This is not the question I was seeking to answer when we first discussed this topic. I had in mind some rather dull lecturing version of “don’t buy lattes,” and “don’t go out for lunch every day.” I felt like I was Jack. You know Jack right? All work and no play. But then we got to an interesting set of data.
I find it fascinating that housing costs per square foot are about the same as they were in 1973 (adjusted for inflation of course). Yet new homes are about 60% bigger and have less people in them. Think about that for a minute.
Figure 1 - Median cost of new homes, people per household & square feet per person from 1973 - 2013.
The blue line is the median square footage per new home. As you can see, it has grown from about 1,500 square feet in 1973, to almost 2,500 in 2013. The red line is the number of occupants per household and has fallen from around 3 to almost 2.5 over the same time period. The net effect is a near doubling of square footage per person, from 500 to almost 1,000 square feet per person.
Now, if you are knocking down a fantastic income and can afford it, that’s great! Go right ahead and build that mansion. We would love it if everyone was prosperous and could easily afford large homes. Yet the average American has far too little saved for retirement. Could there be a correlation?
The median price for new homes has ranged from $250,000 to $300,000 for the last few years.1 This number is highly dependent on your location. However, consider that if you were to buy a home for $100,000 less, and have a correspondingly lower mortgage, your payment at current interest rates would be about $475 less.2 That’s just for the mortgage. You are also likely to have smaller payments for your property taxes, insurance, heat, electric, and less expense for repairs to the roof and carpet over the years. It is certainly possible that you could free up $700 per month or more.
Let’s say that you decide to do this and free up the $700 per month, some of which you spend. Let’s also say, however, that you put away $500 of that. If you did that for 30 years earning 7%, you would have $613,545. (Future growth and investment performance are not guaranteed; see additional disclaimers below.3)
Source: "The Importance of Being Earnest", J.P. Morgan Asset Management, 2013.
All this to say – if you have too much house, you might be sabotaging your retirement. Remember, you can control some things, and some things you cannot. How much you spend and save is more within your control than you might think, but only if you choose to make it within your control.
If you want to have a coffee and debate about how big or small your house should be, give me a call at 920-617-6830.
Patrick Stoa
- Source of median and average price of new homes: https://www.census.gov/construction/nrs/pdf/uspricemon.pdf
- The calculation of the mortgage savings was determined using a 30 year, 4% fixed rate mortgage. The monthly payment on a $220,000 mortgage would be $1,050.31, while a $120,000 mortgage would be $572.90, respectively. $1050.31 - $572.90 is a savings of $477.41.
- This case study is for illustrative purposes only; it is not a representation of any individual person or situation. The investment return figures represented are not intended to reflect the actual performance of any particular security. Individual cases will vary. Investment yields will fluctuate with market conditions. This information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Prior to making any investment decision, you should consult with your financial advisor about your individual situation.
Housing and household data from the US Census Bureau.
The information does not purport to be a complete description of the securities, markets, or developments referred to in this material, it has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Opinions expressed are those of the author and are not necessarily those of Raymond James. All opinions are as of this date and are subject to change without notice. Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website's users and/or members.
Want a prosperous retirement? Start with this.
How much money do you need for retirement? How much should you save each month to reach that goal? Can you afford that? What lifestyle can you afford if you save less than that? There is only one way to answer those questions…
How much money do you need for retirement? How much should you save each month to reach that goal? Can you afford that? What lifestyle can you afford if you save less than that? There is only one way to answer those questions. You must know what it takes to live your life now. If you know how much money you need to spend on a monthly basis now, you can work off of that number to determine how much you’ll need per month in retirement. Let me explain. (Warning: a little nerdy math ahead. Stick with it!)
If you think you need $50,000 per year that’s got to come from somewhere. Let’s say you have $18,000/year in social security. So you need to make up a difference of $32,000/year out of your own investments. So how much do you have to have invested to produce that stream of income for 30-40 years of retirement? Of course, that depends on how it’s invested. But generally speaking, we encourage our clients to withdraw only 4-6% of their investments per year. Hopefully growth will replace those withdrawals and over time, your money will last and you’ll be able to leave an inheritance. Withdraw more than that, and not only might you not leave an inheritance, you might run out of money prematurely! So if you wanted to keep your withdrawal rate at say, 5%, you’d need to have $640,000 invested somewhere. ($640,000 *.05 = $32,000). Make sense? But what if you only need $40k per year? Then you’d only need to have $440,000! (($40k-18k)/.05.) And there it is. The power of cash flow management. So how do you do it? It doesn’t have to be like pulling teeth!
At the most basic level, all we need is a monthly number. If you’re like my mother-in-law, (Love you Deb!) you can simply write it all down in a spiral notebook. Or if you use your debit/credit card for everything, just look at a statement. Of course, if you want to get a little nerdier, you can use excel. Or if you want to get REALLY nerdy (Like me. I’m a budgeting junkie.), you can use both excel (My budgeting workbook. Check this out!) and some finance software like Quicken! I’ve also heard good things about YNAB.com (you’re welcome, Alaina) and Mint.com, which is “free” but ad-supported. But no matter what you use, try to record it all. Cash, debit, credit, automatic bill payments, ACH withdrawals, charitable contributions and even salary deferrals. Everything. At this point, you’re probably pretty close to the real answer. Take a victory lap! You’ve done more than most people. You could stop there and be able to do some legitimate long-term planning. But you’ve come so far and you’re nearly done.
Now, when I taught Dave Ramsey’s Financial Peace University class (yes, I’m one of those people), I got in the habit of not only accounting for my monthly spending, but also quarterly spending (Water bill, anyone?), and what I call “eventual spending”. These are expenses that I know I’ll have but I’m not exactly sure when. Like birthday and Christmas gifts, furniture replacement, vacations, home maintenance, car replacement/repair, etc. I just sweep a certain amount into savings each month and let it build up for those eventual expenses. Yes, it’s a lot. But it’s part of your cost of living and you’ll probably spend it in retirement so it needs to be quantified.
Sigh! That’s it. Well, step one. But it’s a huge step. And one that puts you in the driver’s seat. Armed with that budget, a financial advisor like ME is much more able to help YOU figure out what you need and how to get you there. Well done!
-Mike Macco
The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Mike Macco, and not necessarily those of Raymond James. Past performance may not be indicative of future results. Investing involves risk and you may incur a profit or loss regardless of strategy selected. The hypothetical investment return figures represented are not intended to reflect the actual performance of any particular security or portfolio. Individual investor's results will vary. Raymond James is not affiliated with and does not endorse Dave Ramsey.
New Year's Resolution
If I were to make a generalization about the people who have bright financial futures ahead of them: they are prodigious savers and investors. For the most part, they have set up their wealth accumulation plan to be automatic, via either large 401(k) contributions, large contributions into other investment accounts, or, in many cases, both.
It’s nearing the end of January. Earlier this month, we put out a video about a financial New Year’s resolution. This topic is important enough that we felt it should be our first blog post ever.
So, if you want to skip the rest – here it is: In our opinion, you should increase the amount you are automatically investing right now. Don’t think about it. Don’t resolve to do it at a future time. Just do it now.
This thought comes from a simple place. Some of the people we see may be headed towards disappointment and all seem to have one thing in common. They have not set enough aside for their future.
On the other hand, if I were to make a generalization about the people who have bright financial futures ahead of them: they are prodigious savers and investors. For the most part, they have set up their wealth accumulation plan to be automatic, via either large 401(k) contributions, large contributions into other investment accounts, or, in many cases, both.
The fact that the accumulation is automatic is important. If you have to remember to write a check every now and then, it probably won’t happen. Compare that to the one-time effort to increase your 401(k) contributions by 1% or 2%, or the time it takes to set up or increase the automatic draft into an investment account. It’s one and done, and then it actually happens.
Beyond actually happening, let’s talk about a couple of finer points. First of all, if you have an Employee Retirement account such as a 401(k), and there is an employer match, be sure to contribute enough to earn all potential matching dollars. That is free money. Don’t let it slip away.
Next, what I have observed is that most people can almost always invest more than they are right now. I challenge you to increase your automatic investment right now. Even if the change is only $50 or $100 per month, commit to starting now, and continue for six months at least. It has to be automatic. If you are like most people, you will find out that you barely notice that the money is not in your checking account. Then, in six months, if it has not hurt, do it again. And again.
Using this method, I have observed people more than double their monthly investments. And that alone can make a significant impact on their long-term accumulation.
Patrick Stoa
For questions, comments, and conversation, call us at 920-617-6830.
The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Patrick Stoa and not necessarily those of Raymond James.