Let’s talk Retirement Saving

OK, let’s look at retirement savings. As I’ve stated elsewhere, I’ve got some through the power of negotiation and I know many others do too. When I began looking into them I wondered why annuities were chosen over a 401k or other forms of retirement. After all, most retirement advice I have found focuses on 401ks and that’s fine and good if you have one. If you don’t, however, you find yourself in the lurch.

And I know many people who are in this exact situation: no 401k but other vehicles where they could save for retirement.

Does this mean individuals who do not have a 401k are destined to have a rougher time in retirement? Thankfully the answer is NO. Like a lot of other areas in our lives we are going to get out of retirement what we put in; literally, that is. Simply put, if we moderate our behavior and do our homework so to speak we can come out ahead. We must do our due diligence and let’s face it; not many of us do.

This is especially true of many of the people I am talking about. For most their retirement savings are there not because they scrimped and saved for years and years; rather, they have retirement vehicles and money set aside because of the mighty power of negotiation. Their spending habits haven’t wavered during much of their working career and in many cases they were able to make ends meet without major changes. Now if it sounds like I’m making a problem out of nothing I suppose the criticism is warranted. After all, if through the power of negotiation there are retirement funds available and they are healthy, why quibble?

Social Security the “Retirement Savings” Example

I think social security is perhaps the greatest example here since it affects everyone. I know of individuals who are retired in their late 50s and struggle to make ends meet. For a variety of reasons (health, accident at work, years of hard work takes it toll on the body) they have had to either retire from work or seek a lesser strenuous employment which often means less money coming into the home. Currently, the earliest age at which they could draw social security is 62 and that is at 75% of what a person could draw since they are effectively retiring 4 years early!

Now imagine a person who has to retire early or semi retire due to a decaying body or other reasons undisclosed. I’ll bet the farm we ALL know someone like this. This person didn’t have any funds saved up to help in retirement since they figured they had a pension and an annuity or perhaps the money they made didn’t go very far and they never saved. There are a million ways in which the scenario could go and since it is different for each individual, you can imagine just about everything. The outcome, however, is the same: the individual retires early and is in a financial squeeze for years to come and for many it is like this until they die.

Living off of your social security benefits alone doesn’t sound very enticing much less 75% of it. Many struggle paycheck to paycheck during their normal work life earnings and somehow they are going to be comfortable living off social security? Doubtful. I know quite a few people, though, who have had to do just what I described. The process is painful and major changes had to be made to their lifestyle until they were eligible to access the other retirement accounts.

In the above scenario, an individual needed some savings as a stop gap, a temporary source of income until they reached the full retirement age and their other accounts could be tapped into. Once the allotted time passed the individual then was presumably able to retire at a comfortable level.

But what about an individual who not only doesn’t save for retirement on their own but also has no form of retirement at all? Sound odd? It shouldn’t: millions of Americans are in this very spot. Social Security is the only thing that will keep them out of extreme poverty and destitution in their not so golden years.

“Established” Retirement 

Here’s another example: Let’s assume an individual has workplace retirement accounts (in our case a pension and an annuity fund) and throughout their working career they have always thought those accounts would be enough. If you have a keen eye for financial times, you’ll recall 2008. The market took a huge tumble and many retirement plans were devastated along with it. The closer a person is to retirement the less volatility they can successfully endure since they lack the time to recoup the loss their accounts sustained. I don’t have the time to go into the many reasons why this has happened but through a series of widespread events, many pensions are still in rough shape and some are even in declining status. No one can predict the future but I believe austere measures are headed for many individuals before it is all said and done.

What happens if/when those retirement funds are not there as promised? We could analyze all day and night why this could happen and what has transpired to bring about difficult times. And while that helps us in our future endeavors regarding retirement, it does little for those who are directly affected by the changes – and they are coming for a lot of people.

What happens when a pension goes bankrupt?

What happens to a retiree who is living off a set income and the funds dry up?

What happens when your whole retirement plan is thrown in disarray when drastic changes are enacted attempting to sustain the retirement fund?

What happens when the retirement age is raised (as it WILL happen to not only pension plans but also social security) or the benefits reduced (another likely scenario with both a pension and social security)?

All of these are valid questions worth asking yourself when creating your retirement plan. Drastic changes could be on the way for millions of Americans and many are not prepared for them.

Think it can’t happen? Consider this caveat written on the social security statement I received:

“Your estimated benefits are based on current law. Congress has made changes to the law in the past and can do so at any time. The law governing benefit amounts may change because, by 2034, the payroll taxes collected will be enough to pay only about 79 percent of scheduled benefits.” (bold mine)

We could argue endlessly as to why social security is in the shape it is in and what lead to these issues but that is a whole separate post. Suffice it to say changes will happen.

 Enter Retirement Savings 

Supplemental retirement savings can and should come in various forms for people who take retirement seriously. For our scenario I assumed those individuals who had a pension also had an annuity through the power of negotiation (a collective bargaining agreement). That annuity fund is in fact a supplemental retirement fund; that is what it was designed to be. The question then becomes, is that enough?

I’m inclined to say no but that depends on where you are at, how much is put in the annuity, and how long you have had contributions going in it. Just the other week I was talking with a co worker about some ironworkers up in New York he had met recently – and they began to discuss wage, retirement, etc. Some of those guys had over 2 million dollars in an annuity fund! That’s fantastic. The vast majority do not have anywhere near this level of retirement at their disposal – and this does not even include their pension. They could afford to retire, move to a different location (practicing Geoarbitrage) allowing their money to go further if they wanted and they should be just fine.

There are people like this across the country but I hesitate to say its the norm – because I don’t think it is. For many who have an annuity fund it is a nice supplemental account but the balance in it is nowhere near what some people have in it. I know of guys who have under $100,000 in their accounts and their ages range from 20 to guys in their 50’s. I can’t imagine staring at retirement in the face and having very little to show for it.

Now before nasty comments are left here about people who fall on hard times please know I am aware of them – and I know some personally. I know a guy who got cancer and were it not for a cancer insurance policy he would have lost just about everything. I know another who had a bad car wreck coupled with his body wore out from hard work who had to retire on social security disability – his sole source of income. I know guys who have been taken to the cleaners by their ex’s for everything they had – and half of what retirement they had. I know guys who have lost it all; destitute and had to start completely over from scratch. Believe me, you don’t work in the field and not hear stories like that.

Those scenarios, however, do not describe most people; they describe the exception, not the rule – or, at least they should, anyway. Most people live their lives with relatively low turbulence and plug along day after day, going to work and have the potential to save for their retirement but for many reasons they don’t. The average American household has NO RETIREMENT SAVINGS AT ALL (roughly 45 percent).

It shouldn’t be this way and it doesn’t have to be.

Retirement Savings – Individual Retirement Accounts (IRAs)

An Individual Retirement Account (IRA) is simple to set up and is a step in the right direction. For our discussion, there are two different types: traditional and Roth; and the main difference has to do with how they handle taxes (there are some other minor differences but they are not important at this point).

A traditional IRA defers taxes, meaning you put away the money tax free and will pay taxes in retirement. Your money grows tax free and when you begin to take distributions you are taxed. Most people make more money during their working years vs retirement years and with this route they pay less taxes overall. The annuity funds a lot of people I know in the trades have work in the very same way: taxes will be paid on the money when withdrawn in retirement. This means more money is in the pot to grow so to speak.

The Roth IRA is the exact opposite. Individuals pay taxes now on that money and in exchange the money is now TAX FREE and grows TAX FREE. For those who are just starting out their working career they likely are in a lower tax bracket and it is a fantastic vehicle for them to turbocharge their retirement.

In short, a Roth IRA you pay taxes in the beginning and with the traditional IRA you pay taxes in the end.

*Here is why I chose a Roth IRA.*

Your tax bracket and situation should be the factor for which IRA you choose to set up but since you have made it to this site I strongly encourage you, whether you go with the traditional or Roth, to at least open an IRA and begin contributing. No one wants to be part of the 45 percent of households with no retirement savings. Plus, it’s a great problem to have if you have too much money in retirement (in which case you can always send the excess to me).

If you are in the 45 percent of American households who have no retirement savings or perhaps you have a small nugget set aside, you still should save for retirement. Your greatest asset for retirement is the income you generate during the 40 plus years you work. It is during this time that most individuals have the capacity to sock away a lot of money but they let everyday life and hassle get in the way. Many a person has said they would save when…(insert excuse here). That time never comes and that person never saves. The days are long but the years are short. Next thing you know retirement is knocking at the door and you dread answering because you know you are not ready.

Retirement Savings – It Takes Discipline

Retirement is a long term strategy but you can’t win if you don’t play

For those of you who work in an office or have a consistent 40, it is easier for you to open up an IRA and have your deductions taken out and automatically contributed. You know what your check is going to look like and that adds stability when looking at your retirement saving. Furthermore, you likely have other retirement vehicles at your disposal and you should definitely max them out if possible.

For those on the outside, it still takes discipline – just applied in another way. I realize most go from jobsite to jobsite and the hours are unpredictable, the length of time can be unpredictable, as well as where the next job is coming from. Bills still have to be paid, though, and most do so even in this environment. Looking at retirement as a bill is a sly form of discipline that can aid you greatly when it comes to saving.

Of course, there is the added element of overtime. Shutdowns, job schedules get behind, jobsite conditions permitting overtime allow you to save a massive amount of money in a short duration. For some the reality of saving between $5000 – $10,000 a year in after tax money is very easy. For others, it may take them to start out small and build up to a higher amount. Wherever you find yourself, I strongly suggest you are honest about where you are at and what you wish to accomplish. If you don’t have a goal you can be sure you won’t hit it.

For example, lets plug in some easy numbers and see what they look like. Lets use $30.00 an hour for a base (yes, I know some make less and some make more depending on where you live but I think it is a good number for this example) and lets also assume the individual works steady with overtime.

$30.00 x 40 = $1,200 weekly

$1,200 x 52 = $62,400 yearly

Now because most run budgets on a monthly basis we have to divide the yearly to get that number:

$62,400 ÷ 12 = $5,200 monthly

This, of course, is all gross and not net income. There will be your standard taxes (federal and state), Medicare, social security, etc., and any additional deductions you personally may have coming out. What’s left is yours to do what you like and since you are reading this article hopefully you will save some for retirement!

Now, lets say on an automatic basis you choose to put away $25.00 a week. A mere drop in a bucket – but it is a start.

$25 x 52 = $1,300 yearly

$1,300 x 30 = $39,000 after 30 years

Perhaps you decide to automate $75:

$75 x 52 = $3,900 yearly

$3,900 x 30 = $117,000 after 30 years

Now let’s do $125:

$125 x 52 = $6,500 yearly

$6,500 x 30 = $195,000 after 30 years

The above numbers assume several things:

1. You are consistent in your saving; every week/month/year you save the amount that matches the yearly figure.
2. You continue to save those amounts throughout your working career, long after you have obtained raises and become more comfortable in your lifestyle. Ideally, though, after so many years of earning income you make enough to pay your bills and have extra over, even after contributing to your retirement savings. This means even more saving!
3. The consistent level of saving should be viewed from your regular, 40 hour (or whatever consistent schedule you work) paycheck. I didn’t include overtime because lets face it; overtime, if available, should NEVER be factored into your budget.
4. You can view the calculations as pre tax or post tax, whichever is easier for you to swing. I contend for many starting out they can swing post (after) tax savings which will end up in a Roth IRA.
5. None of the figures calculate the powerful force that is compound interest. Earlier I said your ability to earn income is your greatest asset and indeed it is. However, coupled with time and compound interest your consistent saving could become a much larger retirement fund. This is why it is often said you need to begin saving when you are young and do so consistently so you can maximize that retirement nest egg.

The extra weeks

There is another way to save and I usually refer to it as the extra weeks. Many figure their budget on a monthly basis and there is nothing wrong with that. The trick is to do your monthly budget on four weeks, which leaves four additional weeks of additional income to save. This isn’t as hard as it sounds. After all, most months have only 4 weeks in them anyway so if you can factor your bills on four weeks in a month you will inevitably have four additional weeks that are not figured into your budget – more to save! Lets look at the example from above:

$30.00 x 40 = $1,200 weekly

$1,200 x 52 = $62,400 yearly

Now because most run budgets on a monthly basis we have to divide the yearly to get that number:

$62,400 ÷ 12 = $5,200 monthly

From this example, we have a monthly budget of $5,200. Now lets look at what it would be if we used the four week method instead:

$1,200 x 4 = $4,800 monthly income

$5,200 – $4,800 = $400 monthly difference

$400 x 12 = $4,800 yearly difference

Or since we have four additional weeks:

4 x $1,200 = $4,800 additional savings

However you choose to calculate it you end up with an additional $4,800 (before taxes). If someone is disciplined enough to pay their bills this way they can save a good deal of money just on your everyday grind at 40 hours.

What about overtime?

Overtime – if worked – should be managed so it doesn’t manage you

For those of you who have the ability to and work overtime you have a powerful asset in your arsenal to save for retirement. For example, using the above figure of $30 an hour, your overtime rate is a cool $45.

According to the Bureau of Labor Statistics (BLS), the average American full time worker works an average of 8.5 hours. That’s a half hour over, or 2.5 hours a week average.

 

2.5 x 52 = 130 hours of overtime a year

$45 x 130 = $5850 in overtime a year

$5850 x 30 = $175,500 in overtime in 30 years

Again, the above numbers do not factor in compound interest, merely a person’s contribution over a period of time.

And I know so many individuals who work a lot more overtime. I know people who work much more overtime than the above statistic whether its a shutdown, industrial maintenance, or just job scheduling issues.  Realistically, the number I’d use is anywhere between to 5 to 10 hours averaged out over a year. Lets look at both:

5 x 52 = 260 hours of overtime a year

$45 x 260 = $11,700 in overtime a year

$11,700 x 30 = $351,000 in overtime in 30 years

10 x 52 = 520 hours of overtime a year

$45 x 520 = $23,400 in overtime a year

$23,400 x 30 = $702,000 in overtime in 30 years

It’s amazing when you plug in numbers and have a hard look at what the potential savings could be JUST ON YOUR CONTRIBUTIONS.

Again, the figures above are not hard and fast when you factor in your own hourly wage and amount of overtime (if any) you work. Take a long hard look at your own earnings and do yourself a HUGE favor and SAVE, SAVE, and SAVE. The power of your contributions over a period of years coupled with investment gains and compound interest could be the deciding factor – whether you are eating ramen noodles to get by or able to enjoy going out to eat when you feel like it. What a travesty it would be to have traded time with your family or what you like to do for overtime and after your working career of 40 + years there is nothing to show for it. And believe me, I know so many people who are in this exact situation and I’m willing to bet you do too.

It’s not too late

No matter your situation there is still time to try and save 

Wherever you are at in your working career it isn’t too late to begin saving for retirement. If you are younger and you’re reading this do yourself a favor and begin saving NOW. The amount of money you could sock away is huge. With time on your side and discipline being the defining characteristic, you can retire a millionaire easily.

If you are a bit on the older scale you can still save for retirement you just might not have the time and compounding interest on your side. However, if you have been diligent over the years, hopefully you have your house paid off and your monthly expenses have been reduced as a result. This can aid greatly in saving money for those approaching years when you retire. Working extra hours, working two jobs, cut unnecessary expenses, saving until it hurts are all ways to make extra income to save for retirement.

There are so many strategies to reducing your monthly expenses, saving additional money, and preparing for retirement which cannot be touched upon here. Rather, they merit their own posts. The aim here then is to turn off the mindset you will have safety nets, figure your retirement security is solely up to you, and begin saving as if it is true. The many different ways to do this are unique to you as well as widespread and no one will apply them to your life: that’s entirely on you.

I hope to discuss retirement vehicles, cutting expenses, increasing your savings, and many additional things here. I’ll also give some examples as to what I am doing to secure our retirement and hope the information can be useful to others as they break free from a debt mindset and realize the situation in front of them.

Begin thinking, then, of what you can do to cut back and save for the future. After all, there is so much at stake. Don’t let retirement just happen to you; instead, plan for it with tenacity.