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Retirement Investing - The Starbucks Investing Plan

October 22nd, 2006 by Papabear

No - this is not a post about investing in Starbucks. If you or I had done that 10 years ago, we would already be retired by now. This is a little more practical.

Many articles on retirement planning and investing for retirement focus on what is the best investment if you have an extra $10,000 or $100,000 lying around. That’s a good thing to know if you really have an extra $10,000 or $100,000. But what about the rest of us?

Sometimes simple changes in our habits can make a tremendous difference in our future. We all know we need to save for the future - and to save on a consistent basis. That’s the cornerstone of retirement planning. But where do we find the money for investments or retirement planning?

Let me show you something that hopefully inspires you to get started investing if you haven’t already. Starbucks charges about $3.75 plus tax for a mocha latte frappachino.

A visit to Starbucks, often daily, has become a habit for many of us. But what would happen if you used that $3.75 a day for retirement planning?

If you begin when you’re 25 and saved $3.75 a day, 5 days a week, that’s about $81.25 you’d have to invest in an Individual Retirement Account (IRA) or other tax deferred account every month. If you earned 8% interest in your IRA, you would have over $285,000 at Age 65.

If you’re already past Age 25, the same principle still applies. There will just be less time to invest and less time for the miracle of compound interest to multiply your money. If you began at Age 35, you would have $187,000 at age 65. Even if you began at Age 45, you would still have nearly $78,000 in your Individual Retirement Account or IRA at Age 65.

This post is not a criticism of Starbucks. They make great coffee. If you don’t buy it there, you can always make it at home or the office for less than 15 cents a cup. You don’t have to give up coffee to begin saving for retirement. The point is that saving even a small amount of money on a consistent basis can pay huge dividends in the future.

Retirement investing requires some discipline, and yes, maybe a little sacrifice. If it’s not Starbucks, find some other expense you can cut back on, and begin your retirement planning by making regular contributions into your IRA or 401(k) plan today.

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    Retirement Investing - Taking It One Day At A Time

    October 21st, 2006 by Papabear

    Yesterday I wrote about re-reading parts of Dale Carnegie’s book “How To Stop Worrying and Start Living”. In the first chapter he talks about the concept of living in “one-day compartments”. That made me thing of the Christy Lane song “One Day At A Time”? About 20 years ago it seemed like a commercial was on TV every 15 minutes selling that album.

    Dale Carnegie tells the story of a speech given by Dr. William Osler, founder of the Johns Hopkins School of Medicine. Dr. Osler spoke to students at Yale on the secret of his success. He said he wasn’t smarter than the average person. Instead he said his success secret was to live in “day-tight compartments”.

    Dr. Osler told how he had taken an ocean voyage back in the days of the great Atlantic steamships. The ship’s captain took Dr. Osler to the bridge of the ship and showed him how, with the pull of a single lever, he could activate machinery to close doors throughout the ship and divide the ship into watertight compartments. This was a great advance in making ocean voyages safer.

    Dr. Osler urged his audience to take control of the machinery of their low lives and to divide their lives into “day-tight compartments” for the voyage through life. He said to seal off the dead past with its mistakes, and to seal off, for now, the future also, because the only time we can control is today.

    Dr. Osler didn’t say not to prepare for the future. He said that the best possible way to prepare for the future was to concentrate on making today as productive and meaningful as possible.

    That’s great advice for retirement planning and life in general. It works for retirement planning if you have 30 years left before retirement. It also works if you’re already retired. We need to make today the best day we can. We can’t change the past, and we can’t act in the future until we get there. Whether it’s retirement planning or any plans for the future, we can only act today to make tomorrow better. Like it says in the song, let’s resolve to live “One Day at a Time”.

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    Retirement Investing - What Would Jesus Do?

    October 20th, 2006 by Papabear

    This blog seems to have taken off in a direction of its own. It wasn’t my original plan to devote so much space only to how-to financial issues. I meant to write a post on the subject of retirement planning and the steps for determining how much you need to save in your retirement savings account to fund the retirement lifestyle you want. When I typed up that little piece of advice, even covering the steps briefly, I realized it had grown into over 1,500 words of advice. Because it got so long, I divided it into 3 parts.

    So before this blog begins to sound like a dry financial planning textbook, let’s talk about some related things. What about retirement planning and planning for the future in general?

    In the Sermon on the Mount in the Kings James version so many of us are familiar with, Jesus says:

    “Take therefore no thought for the morrow: for the morrow shall take thought for the things of itself.” (Matt. 6:25)

    When most of us hear these words, we understand them to mean Jesus was saying you don’t have to plan ahead. I even heard a man once who was bragging that he didn’t have any life insurance, and he justified it based on this Bible verse. That might be fine for him. He wouldn’t be around to suffer the consequences, but what about his survivors?

    I got out my copy of Dale Carnegie’s great book “How to Stop Worrying and Start Living” because I remembered he discussed this. Dale Carnegie says that when the KJV was written 400 years ago, “thought” frequently meant “anxiety”. So the verse is really better translated “have no anxiety for tomorrow” or “don’t worry about tomorrow”.

    The New International Version puts it this way in :

    “Therefore I tell you, do not worry about your life…Can any one of you by worrying add a single hour to your life?” Matt. 6:25-27

    What does this mean for retirement planning? Dale Carnegie says, by all means yes, you should think about tomorrow and do some careful planning and preparation. What Jesus was saying was - don’t spend your time worrying about tomorrow.

    Planning is productive, both retirement planning and other planning for the future. Worrying is not. That was great advice 2,000 years ago. It’s still great advice today.

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    Retirement Investing - How Much Should You Save? - Part 3

    October 19th, 2006 by Papabear

    Here’s the last part of our 3 part series on determining how much you need to save for the retirement lifestyle you want.

    Step 5 - Adjust for Social Security. You’ll notice I left a discussion of Social Security to last. Much has been written recently and much has been said recently, especially by politicians, about the future of Social Security. If you’re within a few years of retirement age, Social Security may be as close as it gets to guaranteed for you. If you’re in your 20’s or early 30’s, it’s anyone’s guess. That makes it a purely personal decision whether to take Social Security into consideration when making your retirement investment plans. Regardless, the math is simple. If you haven’t received a statement from Social Security recently showing your projected payments at retirement, you can call 800-722-1213, you can visit your local Social Security Office to submit a request, or you can go to www.ssa.gov/mystatement.

    Let’s say that your payments are estimated to be $1,100 per month. Because of tax savings, that might be worth $1,300 per month of ordinary income. So if your calculations show you need $5,000 a month in income, you could reduce that to $3,700 per month or $44,400 per year. From Step 4, if your pension plan is going to cover $30,960, that means you have to save to make up the $13,440 difference. Once again that’s $13,440/8 x 100 = $168,000 as your savings goal. From the FinAid.org calculator, that would require saving $175 per month. Now this is beginning to sound very doable.

    Finally, what about inflation? It does reduce the buying power of your dollars in the future. We already adjusted for inflation in using only an 8% real return after inflation rather than the 13% you often hear quoted for the gain in stocks over the last 50 years, which does include inflation. Still if your pension plan payments are fixed once you retire, the value of your payments will be less each year. So to be conservative for inflation, you can reduce the value of your pension plan payments by 30% when you do your calculations.

    There are 2 other simple ways to do address inflation. First, the calculations in the steps above are based on building up money in a 401(k) plan or other tax deferred investment program. The calculations shown in the example are also based on drawing out interest and leaving the principal alone. 401(k) plan rules require that you begin drawing out money by the time you’re 72, if you haven’t begun already. Withdrawing some principal will help cover some of the cost of inflation.

    Second, you can always adjust for inflation by using a lower rate of return than the 8% we used in our example for your own retirement savings plan calculations. It’s not an exact science. No one can predict the rate of inflation for the next 10 or 20 years with any degree of certainty. We can only predict trends for the future based on the past. So use prudent judgment and adjust the assumptions for how conservative you want to be.

    Finally, what do you do if your calculations show you need to save say $500 a month, and you can only save $200 a month? What you do next is critical! Don’t put off getting started until you can afford to save the entire $500 a month! If you put off saving until you can afford it some time in the future, that time may never come, but retirement will eventually come. So - whatever amount you can put aside, get started today!

    I hope this brief series has been helpful. Any comments or thoughts you have are certainly welcome and will be appreciated.

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    Retirement Investing - How Much Should You Save? - Part 2

    October 18th, 2006 by Papabear

    Here’s Part 2 of our 3 Part series on determining how much you need to save each month to have the money you need for the kind of retirement lifestyle you want.

    Step 3 - Determine how much you need to save. Let’s say you currently earn $86,000 per year and have determined you can live on 70% of that or $60,000. To determine the amount of money you need in your retirement savings account by the time you retire, calculate how much it would take to earn $60,000 a year in interest at 8%. The math is simple. $60,000/8 x 100 = $750,000. Next determine how much you will have to save over the years between now and the age you plan to retire to reach your $750,000 goal.

    If you don’t have a financial calculator handy, you can go to one on the website of the good folks at FinAid.org. Just click on the handy calculator at www.finaid.org. This particular calculator says it was designed to calculate how much money to save for college, but you can use it to calculate how much you need to save for any financial goal. For the sake of this example, I plugged in $750,000 as the goal and 25 years left before retirement and 8% return. In this situation, it says we would need to save $783 per month. That’s a hefty sum. Let’s see if there are ways to reduce that monthly savings amount.

    Step 4 - Adjust for company or other retirement or pension plan payments. You need to adjust the amount you will have to save each month by taking into consideration any retirement or company pension plan payments you may be entitled to. Fewer and fewer companies are offering a defined benefit plan, where you are guaranteed a certain monthly payment. However many still do, usually tied to your number of years of service.

    Let’s assume for this example that you qualify to receive 1.2% of your final salary, and that you will be on the job for 30 years when you retire. That’s 1.2% x 30 x $86,000 = $30,960 per year. That means you will have to cover the difference between $60,000 and $30,960 or $29,040 yourself. Applying the same math at 8%, that’s $29,040/8 x 100 = $363,000. Using the calculator on FinAid.org, that’s $379 a month in savings to reach that goal in 25 years.

    Tomorrow in Part 3, we will look at adjusting for Social Security and inflation.

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