Thursday, September 30, 2010

Retirement Strategies

Not retirement investment strategies - retirement strategies. In the time that I have been reading about personal finance, I have come across four primary retirement strategies (or life strategies). I want to discuss them, what they might mean to you, and how to achieve them.

The Four Retirement Strategies
  • Standard retirement
  • Mid-life unemployment
  • Early retirement
  • Live now, work later

Standard retirement
This is the "American Dream" retirement (minus the pension, since those don't really exist anymore). Work hard for 40 years, save a modest amount, and Social Security will make up the rest. This is the realty for most of Gen X. My generation will probably see a reduced SS payout, so we'll need to save more and invest better. I don't think I need to say much more about this.

Live now, work later
I have known quite a few people who have started down this path. The general idea is that you spend part or most of your 20-something years living meagerly and traveling the world. Some have done this instead of going to college or immediately after finishing college.

There are many ways to make this work, but the easiest path is to stay out of debt; it's much harder to travel the world with Sallie Mae or Visa calling every month. You can get a job teaching English in South Korea; go to graduate school in Europe; alternate working and traveling every 6 months; have a benefactor fund it all. Since you're young you can elect to go without health insurance, and you won't need to pay car insurance (or even have a car). You can get by on surprising little, especially in certain areas (South America comes to mind).

I think this may be the hardest path of all; you may not know that you want to do it in advance and, being new to the working world, probably have few resources at your disposal. Then again, you might have a generous family member willing to pay for it all. Most of my acquaintances who have taken this route had Mommy and Daddy to fall back in case of emergencies.

If you really want to slum it, you can make it for a while almost anywhere if you have a couple thousand dollars. Just make sure you have enough to get home at the end if you don't intend to stay.

Coming late to the workforce could have a detrimental impact on your professional life. That's all I'll say about that.

Mid-life unemployment
This is probably the least-discussed option, mostly because it often stalls professional development. It's also more difficult for those who chose to start families before reaching this point.

Mid-life unemployment is much like the previous option, except you use your 20s and early 30s to fund 2-5 years of self-imposed unemployment. Maybe you have a family to take with you. Maybe you have a mortgage but will rent out the house while you're gone. Regardless, this mini-retirement is used to cross things off of your bucket list while you're still young and healthy enough to do them.

This isn't actually that hard to do if you want to do it. If you can save 20% of your net pay for 10 years, you should be able to make it at least 2 years without working as long as you don't spend extravagantly on your time off. I'm not fond of this, though, because you'll probably end up working until much later in life than you would have otherwise. Additionally, if you have a 401k, you can't make a withdrawal from it without facing a pretty stiff penalty.

Early retirement
A lot of people shoot for this one, and it's sometimes hotly contested within the PF community. There are those who want to work as hard as possible for as long as it takes to build enough of a nest egg to retire. The limit seems to be 20 years, though, and I understand why: I don't know how anyone could voluntarily work more than 60 or 70 hours per week for longer than that. Still, some people crack their own whip with the goal of retiring at 40 or 45. I work with a guy who works up to 100hrs per week (if we let him), but the bosses have started cracking down on him because he's just not that productive; most of us could do in 60 or 70 hours what he does in that 100. (He also spends much of that time trying to do other people's jobs, which doesn't make him many friends).

Personally, I love this idea. I think everyone does. Well, at least the part where you retire early. For people with more traditional career paths (like me), this is pretty much impossible. I'm going to need another 8 or 10 years to pay off my student loans before I can seriously start saving for retirement. I might make it big with one of my side hustles between now and then, but probably not. And while I don't have a traditional family, I have a a half-dozen hobbies and a girlfriend who will probably become my wife. I'm working pretty had to get out of debt, but I don't know if I'll have that same level of motivation for retirement.

The problem here, again, is that you can't (shouldn't) touch your 401k until you're of proper retirement age. You'll also have to wait to collect Social Security, but since you made so much bank when you were working you'll probably be able to collect the maximum benefit when the time comes.

Lots of government employees get a good crack at this one; they are pretty much the only remaining group to get pensions in the USA, and most get them after 20 or 25 years of service. They can choose to continue working after they qualify for retirement, which grows their pension even more. My landlord is a former firefighter who retired at 50 and lives a nice upper-middle-class lifestyle, though he also ran a hauling business on the side when he wasn't on the clock.

Right now I'm just hoping for a comfortable retirement by the age of 65. Maybe once I get out of debt I can start dreaming bigger.

Wednesday, September 29, 2010

Wachovia's Way2Save account

I feel the need to share this because it's such a good deal compared to other banks. (I am in no way affiliated with Wachovia/Wells Fargo and do not stand to profit from blogging this.)

I joined Wachovia's Way2Save program six months ago when I started a part-time job. All of my hustle money goes here.

The money is deposited into a checking account. Each month you can choose how much to transfer over to the Way2Save savings account ($100 max each month), where it earns 5%  interest for the first 12 months. At the end of 12 months the 5% interest rate goes away, but there is a one-time 5% bonus on the balance at the 12 month mark. Additionally, any purchases made with the checking account will move another dollar to the Way2Save account.

If I'm doing the math right, I'll earn $27.89 in interest, and the 5% bonus on $1227.89 ($61.39) brings me to $1289.28.

Not bad for depositing $100 each month for a year. Even if you put all $1200 into the checking account the first month, that's still a 7.44% return on the investment.

There are a few small catches, but with diligence they can be avoided. After the 12 month intro period, the account has a $5 monthly fee. This can be avoided by closing the account (no fee) at that point. The checking account is free but I'm not sure if that continues beyond the introductory period.

Disclaimer: I can't see anything about the 5% bonus on the website so I'm not sure if it's still in play. Ask a Wachovia rep if necessary.

My one beef with Wachovia: my local branch is only open 9-noon on Saturdays. I could have used the ATM to make a cash deposit, but I have not activated my card so I don't spend any of that money.

Tuesday, September 28, 2010

Gold bubble?

How do you feel about the runaway gold prices over the last few years?

I've been skeptical about it from the beginning, and I'll tell you why: gold is not a hedge against inflation. Historically it has been, but there's no guarantee that it will continue to be a safe investment in that regard.

Gold has little practical value. It's not widely used in industry. We don't need it to live.

It has been ingrained in us since we were children that gold is precious and valuable, but why? What good does gold do for you? Does it increase your quality of life, or is it just something that we covet because the previous generations told us to?

We pay top dollar for gold because it's rare, right? Think about this: gold is recyclable. It can be melted down and re-purposed. Much of the gold available today has been recycled. The jewelery shops and smelters are making money hand-over-fist on gold they've already sold before. When you die, your heirs will pawn or sell it back to them, and they'll melt it down into the fashionable style of the time and sell it again.

And here's my ultimate point: gold has little industrial value. Yes, it's used in small amounts in a few industries, but despite the rarity, we're not going to run out of gold any time soon. Gold is only valuable because we like it and because we're convinced that we have to pay handsomely for it.

The gold bubble is going to burst. It is not an emergency form of currency because it has zero survival value. If the zombie apocalypse happened tomorrow, what reason do I have to give you a gun and some food for your shiny ring? Much like the housing bubble, it's only worth what people are willing to pay for it, and I have a feeling that people will wise up and realize they have better places to put their money.

If you're looking to invest in gold, take the safer route: invest in the mining companies. They stand to make the most money on the current prices, and it'll be easier to get out of your stock position when gold prices come crashing down.

Monday, September 27, 2010

How do you include your significant other in your financial goals?

For some of us, waking up and smelling the financial coffee isn’t terribly difficult once we get nudged in the right direction. It’s easy enough to handle our business once we know what we have to do.

But how do you get your partner on the right track as well?

I’m in a stable relationship of about 3.5 years (“pre-engagement” is what some have called it) where we keep separate finances. Ms. 104 makes almost exactly the same base pay as I do (sometimes I get overtime), but her expenses are different than mine. Our individual savings rates are different (0% vs. whatever I can hustle), and we have different fixed expenses. Because of our student loan debt, we could move back in with our parents, sell our cars, cancel our cell phone plans, and live like adult children and still owe a combined $700 per month.

We are both committed to moving to Colorado in August 2011, but I just can’t see her making it happen for herself. She occasionally shows interest in personal finance, but quickly reverts to the “if I have it, and it’s not dog-eared for a bill, I can spend it” attitude. By my count she probably could save as much as $400/month if she wanted to, but I just don’t know where the money goes. She’s never been able to explain it to me or to track her spending well enough to show me. I'm also on the verge of paying her half of the fancy bed she wanted to buy because she didn't like the bed I brought with me when we moved in together; the 0% interest runs out in November and she hasn't paid anything on it since we bought it 10 months ago.

So what’s a guy to do? I won’t leave her behind. I can’t change her habits unless she wants to change. Two weeks ago she asked me to go over her finances with her (again), but she has yet to make time to do it.

I have to make it happen for us. I want to move and I want to take her with me, so I have to hustle. At the same time, I’m going to hold her accountable for her expenditures. I might even cut up her Kohl’s card that seems to get used every time the balance reaches zero. If I can show her how hard I work to make this happen for us, she’ll eventually get the message. I have to lead by example.

I know that she could never make the move without my help. I'm just worried that she can't do it with my help either.

Friday, September 24, 2010

Luxury layaway?

How do you feel about this?

I remember as a child my mother would occasionally use layaway at K-mart to lock in out-of-season prices on things like winter coats and school supplies without actually buying them right then. Either she didn't do it often or stopped when I was pretty young, because I only remember her doing it before I turned 10 or so.

I actually worked part-time at that very K-mart this spring. I was shocked to find out that people still use the layaway service. Having lived most of my life (from about 12 years to present) in a solidly middle-class family, It hadn't occurred to me that a fair number of people shopping at these discount stores would need layaway because they couldn't qualify for credit cards.

I suppose avoiding debt is admirable, but to my rational mind it looks like financing the item and receiving the item after paying instead of before.

Layaway is interest-free, but some places will charge you a flat fee for using the service. It does not trigger a report to the credit bureaus, so it can't affect your credit score. Then again, you can't build credit with it.

Most importantly, if you can't make all of the payments, you get your money back minus a restocking fee.

The financially prudent way to proceed is to save the cash in an interest-bearing account until you can afford the purchase. The flip side is that you may find a sale or special price that will not be available later. My personal opinion is that if it's something you can't pay for now and don't need immediately, you probably don't need it at all (though I will grant a few exceptions, like a reasonably-priced engagement ring).

Thursday, September 23, 2010

The Other 104 Days

Personal and economic inertia is difficult to overcome. Sometimes we don't know what to do, how to do it, or what we need to get started. This inertia stands between us and our dreams. It overshadows our goals.

It is only through our own efforts that we can overcome it.

I will give you an example from my own life.

I have family living in the Denver, Colorado area. I have visited them a handful of times in my life and each time I fell in love with the state. I've wanted to live there for at least 10 years but have not moved. Most of that time I couldn't because I was still a minor/in school/living at home. I've been in the "real world" for 2 years now and I found myself falling into this trap where I'd think, "yeah, I can do that, as soon as things settle down and the time is right."

What I finally realized a few months ago is that the "right time" will never come without me dragging it here, kicking and screaming. I have to set a date, kick as much ass as I can until that date, and just go.

I'm moving to Colorado in August 2011.

Now, let me explain why it took so long for me to overcome my own inertia.

I'm 25 years old with a college degree in a life sciences field. I graduated in 2008, just as the job market was crashing and burning. I managed to find employment, just enough to pay the bills, and I accepted two pseudo-promotions without any increase in pay because it meant I wouldn't be laid off like the others. I work harder and get less overtime than when I started there, but I still have a job. I have sent out hundreds of resumes and cover letters in the last two years and I had one interview a year ago that went to someone with more experience. I haven't even heard from an HR person in the last 6 months.

I have almost $70k in student loans that won't pay themselves. The prospect of giving up this job and moving to a place I've only seen a handful of times is daunting. I've sent out a few resumes to businesses in the area, but no self-respecting business would hire me for an entry-level position and wait for me to move when they have local candidates to choose from.

I also had to buy a car last year when my 10 year-old Cavalier failed the state safety inspection due to a rusty frame. I still owe about $15k on the new car and I'd like to sell it after I move, but I'm not sure if I'll be able to. This is the first (and probably last) new car I have owned.

 I don't have much money saved up (less than $2k), and my cash flow doesn't allow me to save much at all - sometimes I need overtime just to cover my expenses.

I have other reasons as well, but I think I'll save them for another time. The point is that I can't let fear of the unknown stop me, and you can't either.

Now, the important part. How do you make something like this work?

If you work a "normal" 9-5 like I do (actually, 8-? for me), you have at least 102 days per year that you don't spend at work. These are the days you have to HUSTLE. You work Monday through Friday to live now, but you bust your ass on Saturday and Sunday so you can live better tomorrow.

Get creative with your hustle. Find a way to make a hobby pay. Moonlight at a restaurant. Do odd jobs. Deliver pizzas. Freelance. Sell your crap on eBay. Tutor. Give music lessons. Pet sit. You can make money doing almost anything if you're good at it - especially if it's something other people don't want to do.

 The point is to take action to get you out of your rut. A change of scenery can inspire creativity and help you financially at the same time. Meeting people outside of the corporate world is refreshing.

I'll tell you about my hustles later. What have you tried? What worked? What didn't?