Saturday, January 3, 2015
A very popular “Go to” article in newspapers or the internet is always someone telling you how to retire a wealthy person. Let me amend that, “How to retire as a wealthy person” retiring a wealthy person is an illegal short cut to becoming a wealthy person.
Let me start over.
HOW TO RETIRE AS A WEALTHY PERSON
These articles are particularly popular around this time of year as people prepare their New Year’s resolutions and their tax returns.
These tips to become wealthy are all good and all valid.
1. Withhold from taxes as much income as possible. Sure, you can earn interest on this money if you hold on to it and not let Uncle Sam use it, but unless you are already wealthy you’ll just spend it anyway.
2. Save 10% of your income and invest 75% in the stock market (reduce that percentage as you get closer to 70 years old.) Give up that Starbucks every day, keep that old hooptie, don’t take vacations etc. etc.
3. Mortgage your house with as little a down payment as possible, take out a shorter term loan and pay more than the minimum each month. If you only make minimum payments on a thirty year $100,000 mortgage, you will pay $300,000 in interest*
4. Contribute the maximum amount allowed to any 401K plan. It is tax deferred and payable probably at a lower tax rate when you retire. (Unless you are really wealthy when you retire which is…never mind, just do it!)
5. Contribute the maximum amount every year to an IRA. You can use the contribution to reduce current income tax, and the interest earned is tax deferred.
6. Keep at least 6 months income in cash as insurance for hard times or emergencies. Because that is so easy to do when you are just starting out.
7. Postpone retirement and collecting Social Security until you are 70.
The problem with these tips to retiring as a wealthy person is that you pretty much have to be a wealthy person to follow any of them.
1. If you are not already wealthy, you want to make sure you don’t get hit owing money to Uncle Sam at the end of the year, and you depend on that annual refund as the only way you are really able to force yourself to save any money at all.
2. Lovely to save 10% of your income and invest it every month, however if you are not already wealthy you probably find it is better to pay your rent and the electric bill first.
3. Pay off that house…great advice once again if you are already wealthy, otherwise pay it off with what, and should I pay it down first and then save 10% of my income, vice versa, or both?
4. See response #3 "great advice once again if you are already wealthy."
5. See response #4.
6. See response #5.
7. Great advice, the difference in monthly income from social security from taking it at 62 and taking it at 70 is almost 60% higher at 70. Of course if this is the correct choice for you requires knowing how long you are going to live. It also assumes you can retire at 70 and not be retired earlier against you wishes as is common in today’s environment. It also assumes the government will not default on SS or push the retirement age back.
Living within your means is very good advice. Following these 7 tips is good advice to the extent you can follow them, however living today is also important. It would be nice to take a skiing vacation at 35; at 70 you may not be able to ski. It would be nice to afford a big house at 70, but at 70 you only need a small apartment. It would be nice to be able to give to your grandchildren and help with their college expenses and other things, it is more important to provide those things for your children.
All these 7 tips do is make people living pay check to pay check feel guilty. Save what you can when you can, pay down debt if and when you can, don’t buy a mansion when a nice townhouse will do, be responsible.
Don’t sacrifice everything today to be wealthy when you are 70. You may not make it to 70. You may not be able to use the money at 70 like you could have used it at 35-60.
Finally, if at 70 after scrimping your entire life to pay down mortgage and debt, saving retirement funds to the maximum, investing in the market and all the things experts say you should have done, you become the wealthy person that your heirs just may want to retire as a short cut to becoming wealthy.