Financial Advice Back to Lessons

  • My Financial Advice for young people, especially if you're just entering the workforce:

    • assume you'll get nothing from Social Security when you retire. Invest and budget accordingly.
    • start investing in any retirement, stock investment, 401(k) plan, or anything your employer offers, ASAP.
    • when you get a raise, put half of it into those contributory plans and take the other half home
    • ... Until you're maxed out in all of the plans.
    • pay off your home mortgage as quickly as possible. It may not be the best investment in terms of ROI, but there are few feelings in the world as good as not having to make a mortgage payment every month, and it does wonders to your budgeting!

  • How to budget for your retirement:

    • Estimate your yearly gross salary at the time you expect to retire.
    • Multiply that number by 20 [yes, twenty!].
    • Add approximately 40% [ ie, multiply that number by 1.4 ].
    • That is roughly how much you should have "in the bank" [actually, in growth and interest-producing investments] on the day you retire.

    • Anyone who tells you your total living expenses will be 20% lower in retirement is a fool or a liar. You'll need roughly the same gross income after retirement as before.

    • If your investments return, on average, 5% per year, 1 / 5% = 20. You need twenty times your final gross salary inside your investment portfolio if it returns 5% per year, in order to produce your last salary on a yearly basis. Basic math.
    • Why multiply by 1.4? Because some time during your retirement, there will be a "market crash," recession, depression or some kind of financial shock to your overall investments which will whack it down by 20-30%. A 30% drop from a 140% starting point still leaves you with about 98% of your original requirement. Simple math, again.

    • Over the long haul, it may be possible to average 5% a year gain with a diversified stock and bond portfolio, so even with inflation, you'll come close to "never running out of money before you run out of years."