I was having a chat with one of my employees and the term 60/40 came up as I have the business news stations on as a requirement for my staff to learn about how business intersects with their everyday life. So, the topic of 60 / 40 came up and he said quite, simply --- "What is 60 / 40?". I immediately responded with the answer that it is a commonly used term for the ratio of your investment of retirement portfolio that should be allocated across stocks (60%) and bonds (40%). He then whipped back who in the world would know that and I kept insisting that it's common knowledge. I then realized once again the purpose of this blog and why I've been writing for the last 20 years. There are so many things that I take as common knowledge but when shared with the world in a simplified way --- it can change minds and lives.
Saving for Retirement 101
There are no special tricks when it comes to planning for your retirement. It takes balance, discipline, courage, and humility.
Balance - You must be able to balance your personal finances and position yourself in a way that allows you to save extra money after ALL of your business and personal life expenses are covered. EASIER SAID THAN DONE. This is why I'm not a fan of all of these modern-day financial podcasts. You're telling me to retire but no one is there to guide you along the way. You want my clicks and eye balls but you don't have the true playbook. I'm not going to get into details today but you need to monitor your expenses daily and save from when you first start working or retirement may be difficult or a burden to your loved ones.
Discipline and Courage - If dieting is hard, imagine how hard it is to save money each paycheck for something 10/20/30/40/50 years from now. That takes a type of discipline most people aren't ready for. Find a system that works for you. If your company takes money out of your paycheck then great do that. If you put it in a savings account that you don't touch, perfect. If you need a financial coach or advisor -- they get financially fit. It take courage to do something not everyone is doing.
Humility - I always like to add in the concept of legacy. There is a certain amount of humility that is needed to save not only for yourself but to be humble enough to know that eventually you won't be around and your family or extended family may benefit from a boost. I've heard the phrase the rich get richer, but I truly believe it's the rich pass on wealth from generation to generation which only makes it harder for them to be broke. We speak of a simple term call compounding interest and at some point your funds or the legacy funds you leve behind with accumulate to a level where it truly generates enough income for someone to survive upon. To understand that you may not benefit from this but your future generations may --- take some mind-blowing humility in how life works. There are some truly self-made millionaires and billionaires but if you ever did some research on some of the famous or rich people that you follow --- chances are they inherited that wealth of skillset.
I would fail if I was asked the question, what book are you reading. I tend to read and save webpages of articles. My phone has over 30 open pages of articles I want to get back to. One of those was about 401(k) accounts. This has become the default type of account for many people who work corporate jobs and usually do not have a pension. Sadly, this isn't available to every person in the world or even every American. The concept behind the account is what we write about here all the time --- saving money after each paycheck for a rainy day or retirement.
So here is a quick rundown of how to save for retirement:
Save Cash - Save cash after every paycheck and put it in an envelope or savings account. The problem with cash is if you can easily get to it you may easily spend it or like bitcoin --- if the amount gets large and you begin to get unwanted attention it becomes ripe for stealing.
Individual Retirement accounts (IRAs) - Often called traditional IRA, this type of retirement account is tax deductible from your income and if you set it up seamlessly the money comes out and you now have rules imposed on you that penalize you from pulling funds out. There are US government limits on how much money you can make to contribute so do a quick search to see if you qualify. I'm getting old but awhile back the limit was roughly if you're single and make over $75K a year the full contribution begins to scale down. There are limits for other filing types such as married jointly, etc.
Pensions - This is a dinosaur method of saving money for retirement. It was a gem when you had a company of government entity pay for your retirement. You work and they foot the bill for a defined amount of cash you would receive for all those years of service. If you ever get an opportunity to earn a pension with an organization, consider this a huge huge incentive to work for them. As this is a great way to get money during your golden years.
401(k) - The vehicle that took the reins from pension accounts many years ago. The simple way to think about this is you are responsible for your retirement as the money comes directly from your paycheck. To incentive people, the money is tax deductible, so this was effective way to create and increase the wealth gap. If you don't work for a company that offers this type of retirement account or you don't have a good handle of your personal budget --- then you'll be left behind as pensions are a thing of the past. You miss out on reducing your taxes and free money as many companies provide a small match (think donation that tax deductible for companies 👀) into your retirement account.
Roth 401(k) - similar to its sibling, this retirement account is funded with after-tax money. The cool thing is the word "after-tax", so it grows tax-free. It's cousin is the Roth IRA, but you get to stash away way more than the paltry amount allowed for a Roth IRA, and don't forget that match of donation added by companies is still allowed.
I'm planning to continue to learn more about the mega backdoor roth path that were pushed to the headlines by the likes of Peter Thiel and others just a few years ago. It is a way to move after tax contributions into a retirement vehicle that can no longer be taxed. Ironically Peter then used his "retirement account" to invest in companies that went on to earn him over $6 Billion dollars in returns if I recall correctly. We are now in High Earning Not Yet Rich (HENRY) status for those of us that want to explore if their company offers this in their retirement plan. Further, not many of us can use our account to invest in startups the way Peter did. But hey we can all dream so that's what I'll be researching in the future.
