I’ve Paid For This Twice Already…

Archive for the ‘retirement’ Category

I attended a small, liberal arts women’s college in western Massachusetts for my undergraduate education.  One of the things that they did upon graduation was held a seminar (and the seminar could have been just for student loan holders, or it could have been completely optional to attend - the details are fuzzy in my head) with a financial planner, and she gave a presentation and some advice to the graduates.  One thing she said stuck in my head, and I don’t know if pure math backs it up, but it is about the power of compound interest.

Save $2000 a year in a retirement account every year in your 20s, and even if you stop saving right then, you’ll be ahead of those who start saving $2000 a year every year from 30 to retirement by the time you are 65.

At the time, it seemed like magic.  in fact, it still does kind of seem like magic, but compound interest is quite magical.  I was already 22 at the time, so I was already behind on this plan, but I thought to myself - I need to do this.  Or at least, I need to try.  And I did try - but my biggest money mistake, or maybe biggest money regret, is that I didn’t continue to follow through on my decision.

I started graduate school that fall, and I was living on a teaching stipend with no savings, so it took me a little while to save up that first contribution.  But by the next spring, I had saved up enough money to open an IRA and deposit $2000.  At the time, the limit was $2000 a year, which may be why the financial planner picked that number. I did this early enough in the year that I could have done a contribution for the previous year as well as the current year, but I didn’t have enough money to do that and I didn’t think ahead that I could save up for the current year, and I’d never get that previous year back.  So, at the age of 24, I made my first $2000 retirement contribution, with a financial planner I chose because she sent me a mailing.  That’s all the criteria I used to choose a financial planner.  No other reason.  In hindsight (and kind of at the time) I actually knew a little more than she did about IRA contributions, so she wasn’t really the best choice.  But, I digress.

I kept saving, and the following year made another $2000 contribution.  I was also contributing $25 a month to a separate investment account that I started with $500 I had also saved up.  By the year 2000, I had about $1900 in the investment account and was about to make my next IRA contribution.  I really did have the best of intentions, but without a real understanding of what I was doing and why other than saving was important, the risk of me changing course because of a change in the market was always looming.

Because then, in 2000, the dot com bubble burst and my financial planner was an idiot and encouraged my fears about making further IRA contributions, and I basically transferred my investment account (which was about $1100 then) into my IRA for the current year, and never made another contribution to it.

My biggest financial regret is that I didn’t continue to save for retirement earlier.  I’m now fast approaching 34, and as an individual, I haven’t really done much else to save for my retirement.  My spouse and I as a couple have made some plans, and we’ve been using his 401K to save some, but I wish I had not only started earlier, I had continued what I started once I did.  My goal for the coming year is that by the time I turn 35 (my 34th birthday is this weekend) I have a realistic plan for what I want to accomplish as far as retirement savings, and have a plan to execute it once the student loan debt is taken care of.  That will most likely be a combination of my spouse’s 401K and some sort of IRA for me (since I am self employed, I need to look into the self-employment options for IRAs more carefully) but I need a plan.

Nothing like starting 15 years late.  But the only thing worse than that is never starting at all.

This post was written in part as a response to a “Biggest Money Mistake” contest at Millionaire Money Habits.  If you’d like to enter Ryan’s Biggest Money Mistake contest, click on over to his site and read his post! 

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This may sound kind of silly, but for a long time, I didn’t really think about what a 401K is actually for. When my spouse got his job where we live now, we decided to put money into his 401K. We picked a really low percent (I think we started at 2%) rather randomly, and for me, without a lot of thought as to why we were doing it in the first place. His employer gives a match of 20% of the first 6% (so basically, for every 1% of his salary my spouse puts into the 401K his employer puts 0.2% for the first 6% of my spouse’s contributions) and we wanted to get some of that free money, but 6% was a lot it seemed so we signed up for a little. A little free money is better than none!

But, as I said, I didn’t give a whole lot of thought to what it really meant. I didn’t think about retirement as more than an abstract concept of “something in the future there is a lot of time until” and I didn’t think about how much money one might need to actually retire. The 401K was just another thing coming our of my spouse’s paycheck, like health insurance and taxes.

Since I’ve started this blog and gotten rather serious about debt reduction, I’ve also become rather serious about understanding money. And thinking about the future - not just tomorrow or next week but the far off future. And I’m very thankful we’ve been doing anything at all in regards to our 401K. We had increased it once to 3% at one point, but that was about it. When I started actually realizing “You know, someday, we’re going to have to LIVE on this money…” we increased it to 4%. And now, as of today, we have a plan to increase it at the first of the year to 5% and then after my spouse gets another raise, to 6% (around May hopefully) to completely take advantage of the company match.

And there’s more. I realize now that the 401K is actually us, saving money. And has been all along. I’ve thought a lot about how useless I have been in the past about saving money, and yet, I’ve been saving money for years without ever thinking too much about it. It was easy. And that’s the key. My spouse’s 401K is a simple, easy, and hardly noticeable, automated way for us to insure a secure retirement for ourselves.

You’d better believe I have a plan to take advantage of that fact.

Once we are all-but-mortgage-debt free, that 401K contribution will slowly but surely increase up to the maximum either allowed or that I decide after careful research is sufficient. Probably the maximum though. And the method to my madness? Celebration.

Want to celebrate that happy occurrence? Increase the 401K by a percent. Happy birthday! Increase that 401K by a percent. Good job solving that complicated project at work! Increase that 401K by a percent. Did you get a raise? Yippee! And increase the 401K by 2%.

I don’t think it will take much more than a few years to get to the maximum allowed, and hopefully, without too much grumbling and belt tightening and even noticing. It’ll just be the new reality. And we’ll be happier for it later. Just wait until I start making some IRA plans…

This post is also part of Moolanomy’s “Share Your Investing Story” Project

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Last week my spouse’s employer sent home a memo about some changes to the fund lineup in their retirement plans. Now, I am still an investing newbie, and words like Mid Cap and Small Cap still go over my head. But thanks to blogs such as All Financial Matters and Advanced Personal Finance that explain a lot of terms in easy to understand ways, I have learned a bit. So I took the memo, which my spouse declared “gibberish”, and read it over. And, lo and behold, I actually understood it. Well, most of it.

Basically, the plan is replacing three funds they feel are underperforming with three different funds with similar asset allocations and risk profiles. And I actually understand asset allocation (what percentage of the fund is in bonds, stocks, cash etc) and I understand that more stocks mean more risk basically. I’m not a genius or a whiz at this stuff but I do understand a lot more than I did 6 months ago. If we have any investments in the funds marked for deletion they will automatically transfer to the new funds. I still have to check out our portfolio to see if it will affect us.

As I said, I’m not a whiz at all. There is a part of the memo I don’t understand - some funds are changing their asset class from “Value” to “Blend” or vice versa and I have no idea what that means or if I should care. But I’m happy I understand as much as I do.

We are currently in the “balanced” portfolio because I am somewhat risk-adverse but I have been learning to overcome that, so I was thinking of changing to “growth” or “aggressive” (since we have a long timeline ahead of us to retirement) but I was surprised to see that our “balanced” option has performed the best over a ten year horizon of our five pre-mixed asset allocation choices. So now I am thinking I might stay still. Maybe. I have a lot more thinking to do about that. In the short term our 12%/year increase is getting its behind kicked by Aggressive’s 16%. And so it goes.

Yay for knowledge! Although the little knowledge I have might become dangerous… I should really learn some more about investing sooner rather than later. I have some free time on my hands now….

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This week I got my final (I think) statement from Wachovia indicating my account had been closed. I can’t imagine what else they’d be sending me a statement for now that they’ve indicated my account is closed and my balance is $0, but I’m not going to be sure for a while yet. They already tried to charge an account maintenance fee on a closed account, after all.

So now I have the fun task of totalling up what this little transferring to Vanguard endeavor cost me. For, I am sure that every fee imaginable was squeezed out of me. When I began, I had a Roth IRA with Wachovia that consisted of 6 mutual funds and a money market account. According to my final statement, as far as I can tell, I was charged a $7.50 per mutual fund fee for selling them to transfer the money to Vanguard (that seems reasonable, for a total of $45 for 6 mutual funds) and a $95.00 termination fee to close my account. Lovely. I pay you $95 so you don’t have to deal with me any more. Nice. Not really on board with that, but, what is done is done and at least…. it is d-o-n-e. So, $140 in fees later, my money is finally moved and I don’t have to deal with Wachovia any further (I think).

Unless they try again to get another $75 annual account maintenance fee out of me… but I am hoping they’ve realized their error and have moved on.

Whew. Fees are the enemy of compound interest!!

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When I was in my first year of graduate school, I had a friend who was, in some ways, like my very own personal finance educator. He and I came from very different backgrounds and had very different levels of understanding about money and finance. Mine - minuscule. His - vast (to me at least). I was barely getting by on my graduate school stipend month to month, and he was living off his investments. I’d never been taught by anyone about investing money, and I thought it was something that rich people did. Sadly, my understanding of that extended to retirement as well. 401Ks I understood in theory, but didn’t only rich people have IRAs?

Well, my friend Sheldon taught me that you didn’t have to be rich to invest money. He had made a whole lot of money by having a knack for picking the right companies at the right time, but that isn’t what he taught me. He explained about the importance of investing, if for nothing else at least for retirement, and we had long talks about mutual funds and the value of investing for the long term. Instead of seeming out of reach and foreign, the idea actually seemed approachable and doable. We talked about risks and returns and buying for the long term and staying the course. Investing for my future went from seeming out of reach to feeling imperative. I had a little knowledge, and I felt like I could do something great. But a little knowledge might be a dangerous thing.

In my second year of graduate school I got a flyer in the mail from a local financial advisor targeting graduate students as new clients. In light of all my new awareness of investing for the future, I thought it was a good idea so I went to a free financial assessment. I ended up as a result funding an IRA to the maximum for that time ($2000) and starting a small portfolio of my own ($500). This was most of the savings I had accrued to this point so it was a big step for me.

Yes, there are about a dozen follies in what I did. I didn’t bring Sheldon with me to help. I probably should have. But the intent was good. My financial advisor kind of sucked. But that’s another story.

Almost a year after I did this, invested another $2000 in my IRA, had been steadily investing $50/month in my non-retirement portfolio, and was feeling all proud of myself for making so much money (my investments, retirement and otherwise, had grown by almost 25% independent of new money put in), the dot-com bubble burst, and everything I had pretty much sunk dramatically. I learned firsthand about risk and really, I didn’t like it one bit. The next year, I moved my non-retirement portfolio into my retirement one, and called myself done with investing. I was back to feeling like investing was for rich people, and besides, my life had changed, I was married and had other financial commitments than as a single graduate student.

My account has traveled through a few different firms, as my financial advisor moved up and firms were bought by other firms. Eventually my account was separated from a specific advisor due to its small size. But a funny thing happened. Even though I didn’t do anything else to it, it kept growing, little by little. And slowly as I became more educated about finance, I swung back towards believing in investing for everyone, not just the wealthy. I may have made a multitude of mistakes with my wee bit of knowledge, but I also was lucky enough to end up on the positive side in the long run, so far.

A few months ago, I closed my IRAs with the firm they ended up with, and moved them to Vanguard. Even with all the up and down craziness, my retirement portfolio was at that point worth about 50% more than the actual money I had invested in it 5-7 years ago. Not that this result is necessarily typical, but the upward trend is, in general, typical. I had almost accidentally become an investor, and it actually worked. I can’t go back in time and invest more money in my 20s, but at least I had invested some. Behold the power of compound interest.

I’m excited for what I might be able to accomplish in the future with a little more understanding and a lot more commitment to consistent investing for the long run. A little knowledge may be a dangerous thing but a philosophy of continually learning is a better weapon.

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