In the examples in my previous posts, I use the metric of saving $5,000 a year. How hard is this - maybe not as hard as you think.
If you have a good 401(k) match at your company, then you may simply have to contribute $2500 a year to mee the $5,000 goal and your company will make up the rest. Not only that, since the $2,500 is taken before taxes, less than that amout is taken out of your pocket. For example, if you are in the 25% tax bracket, only $1,875 of that $2,500 would have made it into your pocket anyway. So, you may be able to sock away $5,000/year in a 401(k) by only taking $1,875 out of your pocket per year; $156/month; $36/week.
Of course, not everyone has a dollar for dollar company match (me included). Even if all you get is tax savings, making a $5,000/ year contribution takes significantly less than that out of your pocket. A company match decreases the amount taken out of your pocket even more. Under the 100% match example discussed above (admittedly sort of a best case scenario, but not entirely unrealistic) you can save $5,000 in your 401(k) for only $1,875.
Saturday, March 22, 2008
Bonds v Stocks
As noted in an earlier post, if you start young and get a return similar to the historical average for the US stock market, the gains can be dramatic.
Stocks
Investing $5,000/year and earning a 10% annual return:
starting at 25 = $2.4 million at 65
starting at 30 = $1.49 million at 65
starting at 35 = $900K at 65
starting at 45 = $315K at 65
starting at 55 = $88K at 65
On the other hand, let's say you get a pretty good bond return of 6%. The difference between investing in stocks and bonds is dramatic:
Bonds
Investing $5,000/year and earning a 6% annual return:
starting at 25 = $820K at 65
starting at 30 = $590K at 65
starting at 35 = $419K at 65
starting at 45 = $195K at 65
starting at 55 = $70K at 65
Starting young still makes a big difference, but compare the $590K you get if you start at 30 and invest in bonds and the $1.49 million you could have if you invest in stocks and get historical returns.
Stocks
Investing $5,000/year and earning a 10% annual return:
starting at 25 = $2.4 million at 65
starting at 30 = $1.49 million at 65
starting at 35 = $900K at 65
starting at 45 = $315K at 65
starting at 55 = $88K at 65
On the other hand, let's say you get a pretty good bond return of 6%. The difference between investing in stocks and bonds is dramatic:
Bonds
Investing $5,000/year and earning a 6% annual return:
starting at 25 = $820K at 65
starting at 30 = $590K at 65
starting at 35 = $419K at 65
starting at 45 = $195K at 65
starting at 55 = $70K at 65
Starting young still makes a big difference, but compare the $590K you get if you start at 30 and invest in bonds and the $1.49 million you could have if you invest in stocks and get historical returns.
Wednesday, March 12, 2008
100% Stocks
My company recently added these target date funds to our 401(k) plan. As you may know, these funds adjust the mix of investments as someon nears retirement. You pick the fund by the year you plan on retiring. For example, if you plan on retiring in 2040, then you pick the target date 2040 fund. Currently, the 2040 fund offered at my company includes a mix of 92.25% stocks and 7.75% bonds. As the years pass, the mix is going to shift more towards bonds. For instance, the 2010 retirement fund has only 64.75% in stocks and the rest in bonds or short term plays. Of course this varies per the fund company.
So, the question is how much should you and me have in stocks. I would have to say 100% stocks or other aggressive plays (e.g., commodities if you like). Let's say you plan on retiring in 32 years (2040). The 2040 fund offered at my company has 7.75% bonds. What type of hedge is that? I mean, if the stock market is flat this year or the next 10 years, what difference does 7.75% in bonds make - Not much. Maybe you get a 0.5% return instead of nothing. You could put more in bonds to get a greater hedge, but bond returns are simply not high enough. A small percentage in bonds simply drags down returns. Of course this is a blog for young savers with a 20, 30 or 40 yr time frame. If you are only a few years from retirement, you would want to have a significant hedge against fluctuating stock prices.
So, the question is how much should you and me have in stocks. I would have to say 100% stocks or other aggressive plays (e.g., commodities if you like). Let's say you plan on retiring in 32 years (2040). The 2040 fund offered at my company has 7.75% bonds. What type of hedge is that? I mean, if the stock market is flat this year or the next 10 years, what difference does 7.75% in bonds make - Not much. Maybe you get a 0.5% return instead of nothing. You could put more in bonds to get a greater hedge, but bond returns are simply not high enough. A small percentage in bonds simply drags down returns. Of course this is a blog for young savers with a 20, 30 or 40 yr time frame. If you are only a few years from retirement, you would want to have a significant hedge against fluctuating stock prices.
Monday, March 10, 2008
Saving, Investing and the Economy
This is generally a finance and investing blog for young savers. Sometimes you need to talk about the economy to talk about saving and investing.
Anyway, I am now of the opinion that this may a bit more of a protracted recession than I had originally thought. Late last year there was the talk of a possible recession. Early this year the odds began increasing on an almost daily basis. Now, I think that we are in a recession, though it won't be official for a few months. This may be just personal experience, but the company I work for is beginning to brace for the worst - no raises, no travel, etc. I think that bad numbers from a lot of companies are going to begin coming in soon.
Like I said above, I am starting to be concerned that this is going to take a couple of years to work itself out, rather than the 6 months or so I originally thought. There are just a lot of fundamental problems that need to be worked out. Namely, CREDIT. In the 90s, the economic expansion appears to have been built on gains in productivity. Unfortunatly, the expansion of the 00s was built on credit. People were first fueling the economy by saving less and less. Then more and more credit card debt. Finally, home equity loans and the like. Now, the nation is simply tapped out. Even the federal government doesn't have anywhere to go. What can they really do - cut taxes more (I mean something in addition to the rebate/stimulus plan). A nice idea, but not with the current budget.
I place the blame for this recession at least partly on the backs of the spenders. Maybe a few more savers in the land of the free wouldn't be too bad.
Check back for posts on saving and investing in a slowing economy.
Anyway, I am now of the opinion that this may a bit more of a protracted recession than I had originally thought. Late last year there was the talk of a possible recession. Early this year the odds began increasing on an almost daily basis. Now, I think that we are in a recession, though it won't be official for a few months. This may be just personal experience, but the company I work for is beginning to brace for the worst - no raises, no travel, etc. I think that bad numbers from a lot of companies are going to begin coming in soon.
Like I said above, I am starting to be concerned that this is going to take a couple of years to work itself out, rather than the 6 months or so I originally thought. There are just a lot of fundamental problems that need to be worked out. Namely, CREDIT. In the 90s, the economic expansion appears to have been built on gains in productivity. Unfortunatly, the expansion of the 00s was built on credit. People were first fueling the economy by saving less and less. Then more and more credit card debt. Finally, home equity loans and the like. Now, the nation is simply tapped out. Even the federal government doesn't have anywhere to go. What can they really do - cut taxes more (I mean something in addition to the rebate/stimulus plan). A nice idea, but not with the current budget.
I place the blame for this recession at least partly on the backs of the spenders. Maybe a few more savers in the land of the free wouldn't be too bad.
Check back for posts on saving and investing in a slowing economy.
Sunday, March 9, 2008
The Advantages of Starting to Save Young
A quick review of the advantages of starting to save and invest young:
Investing $5,000/year at 8% interest:
starting at 25 = $1.4 million at 65
starting at 30 = $935K at 65
5starting at 35 = $612K at 65
starting at 45 = $247K at 65
starting at 55 = $78K at 65
If you can get the market average of 10% a year, the results of starting early are even more dramatic:
starting at 25 = $2.4 million at 65
starting at 30 = $1.49 million at 65
starting at 35 = $900K at 65
starting at 45 = $315K at 65
starting at 55 = $88K at 65
The advantages of beginning to save in your 20s or 30s is simply dramatic. If you start at 55 rather than 35, you need to save more than 10 times more (in our example, you would need to save $50,000/year rather than $5,000/year).
So, there is the case for starting to save and invest young. Starting to save early is a tremendous advantage. Saving early = comfortable or luxurious retirement.
Investing $5,000/year at 8% interest:
starting at 25 = $1.4 million at 65
starting at 30 = $935K at 65
5starting at 35 = $612K at 65
starting at 45 = $247K at 65
starting at 55 = $78K at 65
If you can get the market average of 10% a year, the results of starting early are even more dramatic:
starting at 25 = $2.4 million at 65
starting at 30 = $1.49 million at 65
starting at 35 = $900K at 65
starting at 45 = $315K at 65
starting at 55 = $88K at 65
The advantages of beginning to save in your 20s or 30s is simply dramatic. If you start at 55 rather than 35, you need to save more than 10 times more (in our example, you would need to save $50,000/year rather than $5,000/year).
So, there is the case for starting to save and invest young. Starting to save early is a tremendous advantage. Saving early = comfortable or luxurious retirement.
Saturday, March 8, 2008
Young Savers
Welcome to the Young Savers Blog. This blog is for people in their 20s and 30s to discuss saving, spending, investing, finances, getting rich slowly, getting rich not so slowly, and the issues that face young savers.
Things have changed a great deal for younger (gen x, gen y) workers. My grandfather and my father each had pensions for retirement. Even if they saved $0 for retirement, they could live reasonably comfortably. I'm hoping to get a nice pat on the back on my last day of work. When my father went to work, he paid for it by working in the summers. When my son goes to college, my alma mater is going to have tuition over $100K per year. On the other hand, people are saving less and less.
How much do we need to save? What should we invest in - stocks, bonds commodities, real estate? Does the traditional investing advice still make sense? What if you are trying to save money, what should you save money on? You've seen the traditional articles that you'll save x hundred of dollars a year if you cut out the morning lattes. What if you don't have a morning latte to cut out, or don't want to cut out a morning latte.
This blog will explore all of those questions and more. Hope that you will enjoy the discussions.
Things have changed a great deal for younger (gen x, gen y) workers. My grandfather and my father each had pensions for retirement. Even if they saved $0 for retirement, they could live reasonably comfortably. I'm hoping to get a nice pat on the back on my last day of work. When my father went to work, he paid for it by working in the summers. When my son goes to college, my alma mater is going to have tuition over $100K per year. On the other hand, people are saving less and less.
How much do we need to save? What should we invest in - stocks, bonds commodities, real estate? Does the traditional investing advice still make sense? What if you are trying to save money, what should you save money on? You've seen the traditional articles that you'll save x hundred of dollars a year if you cut out the morning lattes. What if you don't have a morning latte to cut out, or don't want to cut out a morning latte.
This blog will explore all of those questions and more. Hope that you will enjoy the discussions.
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