By: Adrian Lyles
Lyles Wealth Management
Twenty years ago, Tupac Shakur was slain while riding in the passenger side of his BMW after leaving a Mike Tyson fight at the MGM Grand. Michael Jordan and the Bulls had just set a new NBA record for most wins in a single season. The Summer Olympics in Atlanta, GA was bombed which left 111 injured and two casualties. The O.J. Simpson murder trial began in Santa Monica, CA. Mother Teresa received honorary U.S. citizenship, and Steve Jobs sold his company NeXT to Apple for nearly $500 million. The most daunting perspective about all of these events is that you remember them like it was yesterday. Time zooms by, and nothing stands still.
When you were twenty years old, retirement was a distant concept that your parents talked about. Now that you have children of your own, you begin to realize that if something doesn’t change, you’ll be a greeter at Walmart on your 97th birthday.
There are many items on which we can spend our money, from new cars and furniture to golf clubs and cheerleading camp for little Susie. This very moment, I want you start thinking about your retirement as a realistic possibility rather than a hope, dream, or prayer. Would this have been easier twenty years ago? Absolutely! Though it’s not too late to start planning for your financial future. Forget about all the mistakes you've made, like maxing out that Finger Hut credit card or taking out student loans to pay for a semester of Chinese food. With the proper guidance, almost anyone with a pulse can achieve financial success.
The first thing to realize when thinking about your personal finances is that they are personal. Don’t concern yourself with how much money your neighbor makes or the fancy car your cousin drives. One must create a plan that works for their individual household. Start by creating a budget. In my experience, I find that adding and subtracting is more challenging for the average American than people are willing to admit. Don’t worry, you can do it! Understanding how much money you make is just as important as knowing how much money you spend. If you earn $500,000 per year and spend $500,001, you will eventually be broke.
Take out a piece of notebook paper.
What you may find is that you likely spend a lot of money on unnecessary items. I refer to experience subscription services as retirement killers. Expenses like gym memberships, Netflix subscriptions, and club fees can creep up on the unsuspecting consumer. Sure it may only be $10-$50 per month, but once you add this up, it can be thousands per year. Value every single dollar as if it were your last. Start looking for ways to reduce your monthly expenses. Every six months I contact my cell phone service provider to see what new promotions are available to lower my bill. No sense in spending more money than I have to for what used to be done using a cup and a string.
Normally, when a person’s expenses exceed their income, they don’t look for ways to reduce their expenses, and let’s face it, asking the boss for a raise may result in uncontrollable laughter. Then how do we fund this ultra-fun life style? You guessed it, debt. The average person in America has $15,000 in credit card debt, coupled with $30,000 in student loans, with $20,000 worth of car loans as an added bonus. I won’t begin to include the Rooms To Go bill. The problem with a mountain of debt is that, at some point, it must be paid.
Take out another sheet of notebook paper.
By now you’re thinking that this doesn’t sound like fun at all. Hold on, I’m getting there. The next question you’re asking yourself is what to do with all the money you now have each month that used to be going toward debt payments. This is when you pile away money like a squirrel piles away nuts the night before a blizzard. If your employer has a 401k plan, add as much as you can to it. Many 401k’s match a percentage of the amount that you add. This is free money! The best aspect of employer sponsored plans is that the money comes out of your paycheck before you even see it. This allows you to create a healthy saving habit. Sure you will notice it at first, but after a few months you won’t miss it at all. Planning for the future is a long-term habit that is built by performing actions over time.
68% of workers age 25-64 did not contribute to their 401k plans in 2015. Just a little bit goes a long way. Let’s say you earn $50,000 per year and you add 6% ($3,000) to your 401k. With a good 401k plan, your employer matches this amount making the total amount saved $6,000. I know you’re thinking about the vacation you could take with this money or the new TV set you were looking at while strolling through Best Buy. Remember that healthy habits take time to build. Let’s face it, we’re not getting any younger and that rich uncle died years ago and forgot to jot our name in his will. Now we have to get smarter about how we manage our finances.
The greatest enemy and simultaneously the best friend to any retirement plan is “Time." The longer you have to save and invest for the future, the more likely you’ll meet your goals. I have done speaking engagements to high school students about the importance of financial management. I am persuaded that it is never too early to begin healthy saving habits. The sooner we develop the routine of putting money away regularly, the less painful it becomes. More importantly, when you have a million dollars saved in your retirement account, you’ll thank me that you narrowly dodged sleeping in your children’s basement during your final years of life because you ran out money.
Examine the power of compound growth of money over time. A twenty five year old starts working fresh out of college and gets that entry level position making $45,000 per year. She decides to follow my advice and adds 6% to her 401k plan. Her company matches that contribution, and she allocates the funds to an S&P 500 index fund. Assuming that my well-trained apprentice can achieve a modest return of 9% (which is below the historical average of the stock market), by the time she retires at the age of 65, she will have $2.2 million in her 401k. Not bad considering if she got paid weekly, the amount that would be withdrawn from her first paycheck is only $51.92.
Assume that she starts saving for retirement at the age of forty, and because of experience in the work force, she is now earning $70,000 per year in salary. She decides that better late than never is more advantageous than not at all when it comes to retirement planning. She adds the same 6% to her 401k plan that is matched by her employer. At age of 65, the late bloomer will have $955,000 in retirement assets (assuming the same rate of return as her younger self). This illustration is intended to express two rational outcomes. The first is that the longer time one has to save for retirement, the more favorable the outcome. The second is that the age of forty is not too late to begin planning for your retirement future.
Let’s recap. Surely if we only knew then what we know now, there wouldn’t be a chance in hell you would let Mitchell Sanders, the captain of the football team, make it to third base on your first date. Some mistakes we can rectify. Retirement planning is fortunately one of them. Remember these four key pointers, and you’ll do just fine.
This article is for informational purposes only and should not be considered legal or financial advice. No one should make any investment decision without first consulting his or her own financial advisor and conducting his or her own due diligence.