Are you financing your past or saving for your future?

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

¹http://www.nirsonline.org/index.php?option=content&task=view&id=768

²https://www.nerdwallet.com/blog/credit-card-data/average-credit-card-debt-household/

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.

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. 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.