The new Tesla Roadster goes from zero to 60 mph in 1.9 seconds.  Pretty amazing!  But, as a financial advisor how do I get clients to go from zero to a million dollars invested in 25 years?

It’s easy, just start today.

If ever there were a time to go all in with your retirement savings, it’s now!  Just make sure you’ve done a couple of key steps first.  Start an emergency fund in your savings account that will afford you three to six months of expenses if something were to happen unexpected, and clear all debt (other than your primary home mortgage). With a little intensity, this can often be done in two or three years.

So what does it take to rack up a cool million by retirement? Once you’re out of debt and have that emergency fund in place, you’re ready to begin investing in the future.  This is the fun part of watching your money grow.  According to the Census Bureau’s 2017 report on median earnings by age, the typical household income peaks at over $77,00 between ages 45 and 54.  If there was ever a time to start, it’s right now.

Are you saving 15% of gross household income?  Start by saving 100% of whatever the company match inside your 401(k) is.  So, if the company will match your contributions up to 5% you’ll be setting aside 5% each paycheck which will be coming out automatically and pre-tax.

Then, save in a Roth retirement account.  This money is after tax and should also be set up automatically, but from your bank account rather than with your employer.  You can put up to $5,500 per year and $6,500 per year if you’re over age 50.  Add a spouse or partner to this equation and you’re looking at saving $13k per year for a couple over age 50.  If you’re getting started make it easy on yourself and pick a US index fund that tracks the S&P 500 index or one of the total return funds available and be done with it.  Once you’ve built up an investment portfolio of $100k you’ll be able to select better investments.  Give us a call if you are currently in this position and $800 dollars a month could land you $1 m to $1.4 million after 25 years.

But here’s the deal, procrastination will cost you.  If you wait even five years to begin saving, you’d have to invest an extra $500 bucks a month to hit your million-dollar goal.  Even then, your potential shrinks to $980,000 to $1.2million.

Also, you want to make the most of job changes.  Let’s say you have $25,000 in your 401(k) when you leave your job and decide to use that money to pay cash for a car.  At a 25% tax rate, you’d pocket $16,250.  But you’d lose $8,750 from taxes and penalties.  Not only that, but you’re losing $270,000 in potential growth over 25 years.  I can’t tell you how many times I’ve seen this happen.  People are their own worst enemy when it comes to money and emotions.  Nothing is worth that kind of loss!

What if you leave your old 401(k) right where it is after changing jobs?  Many 401(k) plans charge high fees that you don’t know about, so without an employer match, it may not be worth your while.  For example, a 1% difference in fees could reduce your nest egg by nearly $50,000 if you let a $25,000 balance collect dust in an old 401(k) for the next 25 years.

That’s why it’s best to roll your 401(k) over into an IRA anytime you change jobs.  If you request a “direct rollover”, you won’t be charged taxes and penalties for an early withdrawal.  Your old 401(k) provider will simply write a check payable to the new IRA provider.  From there, you can choose the funds you want to invest in.

Lastly, don’t wing it.  Charles Schwab published a survey last year about how Americans define and manage their wealth.  The report showed some startling statistics:  36% of those surveyed say they do not even have a financial plan.  Less than a quarter (24%) of people have bothered to put a plan in writing.  The study also showed that 42% of 40-somethings don’t have a retirement strategy.  And, roughly a third of Americans say they pay off credit card balances each month and have a rainy day fund.  It’s no wonder that more than a third of people aren’t confident about achieving their financial goals, and only one in five are very confident (p.17 of survey)!

It’s time to get real with your goals.  Learn the value of budgeting, saving, retirement, and overall wealth-building.  If you would like some help making decisions or simply want advice with your financial matters please give us a call.

 

Blake Parrish, CFP®
Senior VP, Portfolio Manager
Phone: (503) 619-7237
E-mail: blake@bpfinancialassoc.com

Certified Financial Planner Boardof Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.”