My 1st Million At 33 – yes, you can do it too

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  • Archive for the 'Retirement' Category

    Going from thirties to fourties

    Posted by Frugal on 14th August 2009

    People say that one may have a mid-life crisis around 40s. That’s definitely true.

    When I started blogging, I have always thought that I’m “young” and energetic. But a reader while in college addressed me as “Sir” as if I’m so much older. Come on, about 10 years ago, I was still in grad school. I didn’t feel that I have grown out of the school years at that time.

    And just a couple of days, I asked my dad NOT to come to airport to pick me up for my upcoming trip to go back home. I needed to remind my dad that I’m almost 40, and he is almost 70, and I’m not a kid anymore. Time flew by so quickly.

    I still remember when my dad was 40. He appeared to me as “old”, since I was a little kid. I wonder how my own kids look at me now. I even have white hairs that can’t be hidden anymore.

    The same story goes for personal finance. I really thought that I was young and capable of taking bigger risk. After 2008 stock market debacle, suddenly I realized that I’m not as young as I thought. What I have lost from peak to bottom, I could have never recovered that by decades of saving until retirement. In reality, if I assume that one could accumulate savings from the age of 28 to 58 for thirty years, I have already used up about one third of the time. Doesn’t that sound a little bit scary?

    That’s why it’s always better to start saving as soon as one can. If you save for consecutive 30 years, you multiply and compound your savings for 30 years. But saving for 40 years will be at least better by 33%=40/30-1. Now, if you only save for 20 years, you will be worse off by 50%=30/20-1. But if you could only manage to save for 10 years, well, I sincerely wish that God will bring you some good fortune. Or alternatively, you can always go out and buy a personal finance book, 99% of which is always overly optimistic. These authors always play games with “stock market return” percentage from 5% to 12%, and then tell you that by math of compounding (if stock markets consistently returns 10+%), you will just become magically rich and retire.

    Is that really so? Maybe it works for this generation of baby boomers, since they’ve got all the entitlement programs supported by all the younger generations which are bigger in numbers. When a population graph looks like a pyramid, with few people retiring, and many youth working, it always work by the Ponzi scheme principle. But most of other generation won’t be so lucky, especially we are already over-burdened by trillions of fiscal deficit.

    Am I too pessimistic? No, I’m advising you to take actions NOW! When you don’t let time (and money) work for you, then time will just go against you. And the only way to break the spell is to take actions now. Whether you’re on a job, or out of jobs, take actions for yourselves. Don’t just sit there, and lament what has transpired. If you don’t do something, your situation is not going to change for you. Plan for the worst, but try your best and hope for the better. Even if nothing happens, at the end of everyday, if you have tried your best in everything, whether it’s saving money, doing your job, or finding your next job, you can always tell yourself and God, that you’ve got a grade of A+ today for the 105% effort that you’ve put in. And therefore, there is absolutely no regret. That is how can a great man and a great task (saving for retirement) get accomplished, one day at a time, even when there may be a long stretch of apparently zero progress.

    That was how I learned my first hard lesson in money.

    Posted in Miscellany, Retirement | 9 Comments »

    The boss of my boss is retiring

    Posted by Frugal on 5th October 2007

    Actually, this is the second one gone for retirement. If I were to take a wild guess, the previous boss probably retired with 0.5 billion. The second boss today probably retired with 0.1 billion. Both of them are definitely incredibly very rich.

    I can tell you that it is one of the most strangest thing to co-work with some 50 multi-millionaires everyday, most of them have at least 10 million dollars. This happens when you join a group of people who had a successful IPO, but you are not one of them. Except for the money part, everything else seems to be normal, except that sometimes you need to pick up the slack for these semi-retiring co-workers when they feel like slacking off.

    Certainly, if I’m in their shoes, I would probably retire long time ago. I will probably pursue other interests such as music or humanitarian activities, or simply fund my own start-up, instead of working for other people.

    But without a doubt, despite the apparent good luck that all of my bosses and co-workers have, they are all extremely smart and hard-working (at least in the past). Success simply doesn’t happen by chance. There are almost always some necessary conditions that need to be fulfilled before the success will happen (maybe except lottery).

    Anyway, my group threw a good party for our retiring boss. Nothing very extravagant (probably $20 per head). And I can attest to you that most of these multi-millionaires are just like you and me, shopping at Walmart or Costco. By the way, we have been using CRT monitors instead of LCD screens up until last year. And today I just worked with another 50 million guy who still has a CRT on his desk. It’s a little unbelievable, but it’s true. Maybe part of their success lies in their extreme frugality, I wonder.

    Posted in Retirement | 6 Comments »

    My Advice To Accumulating Wealth in 20s thru 50s

    Posted by Frugal on 15th July 2006

    Once you create your wealth by having a good job or owning a business, and start to have money coming in, you can then slowly build your wealth by accumulation. The primary vehicle to accumulate a substantial wealth is obviously through savings. Yes, through savings. You may not want to believe it. But the old fashioned and traditional way is the way, and the primary way.

    However small the monthly saving is, a persistant saving that is multiplied and compounded through 30 years can become a large sum. For example, a saving that is compounded at 6.0% APR after 20 years gives you a multiplication factor of 462.04 (instead of 240), which also means that for every $1 you save today, it’s really $1.93 twenty years later (Of course, this is the part of good news about compounding the savings; see the bad news about compounding inflation in the next advice to preserving wealth in 30s thru 50s). Irrespectively to inflation or not, saving is the very first step to wealth. Withou savings, you are always at the origin on the number line, at zero. With some savings, at least you are moving positively forward. So how does one save money without pinching pennies and driving oneself crazy? What is the proper balance between saving & spending money? How does one properly budget one’s expenses? These are the questions everyone ought to ask himself or herself.

    There are no right answers to the these questions. Saving money is a personal choice. You can find my own answer to the proper balance between saving & spending money in the Definition of Being Frugal. I also have an article on How to Budget. But the bottom line of the process of increasing your wealth is (from Steps to Wealth)

    Saving = Income – Expense
    Networth = Asset – Liability
    Accumulating networth is a process by which one controls the expenses and trickle down the savings into growable assets, while reducing liability.

    Because the everyone’s income and spending needs are different, I don’t really think that anyone should have a saving goal as a percentage of their income, whether it’s 10% or 20%, unlike suggested by many personal finance books (see my comments for the mathematical version of the explanation). Just because you can spend more, doesn’t mean that you should spend more. Vice versa, just because you cannot save more, doesn’t mean that you should strangle yourself for that extra dollar or penny. It’s simply not realistic to apply the same rule to everyone. And it’s also the same thing with your saving goals. I don’t think everyone should use 1 million dollar for their saving/networth goal either. If you’re a medical doctor, or a lawyer, you may use a saving goal higher than a million. If you’re the average US household, I won’t advise you to use 1 million dollar for your saving goal at all. Why? While it’s feasible to reach 1 million dollar (not adjusted for inflation) for the networth eventually, it simply does you no good to set a goal that may be reached after 30 or 40 years of hard work. Setting a goal that can only be accomplished that far out will simply drive your mental mind sick of reviewing your progress towards the goal. Every month or year when you review your goal process, your mind will tell you that “boy, I’m so so far away from my goal. Why am I bothering to accomplish it at all?” Eventually, you will quit from even trying to accomplish your goal even when it is possible. I know of no one who can happily and objectively review their goal when the goal may only be accomplished after 30 or 40 years. Human mind just doesn’t work that way. You need to “feed candies” to nurture your mind. Setting a goal just for 1 year is much better. If you don’t know how much you can save, you should start with a monthly goal. If you can achieve your monthly saving goals, you can up your goal by a little more, and set up a goal for the following entire year. Little by little, your mind can be satisfied with being able to reach your saving goals in small steps. Then it is possible to discipline your mind to carry out your daily struggle between the choices of saving & spending, fighting against your desires for immediate gratifications. If your mind does not get this constant positive feedback of reaching your near term saving goal, you can pretty much expect it to retire from trying. It’s simply human nature. Why bother, when you think you can’t even reach it? In fact, if your mental mind cannot be satisfied with the abstract satisfaction of reaching a saving goal, I would even go as far as suggesting people to allocate a 5% or $50 (or whatever number that is suitable to your situation) to simply materially reward yourself/family. Yeah, a sweet bonus waiting for you at the end of month or year after all the hard work of saving money frugally and diligently. An extra and regular festival on reaching saving goals may set you back a little, but hey, it’s really a million times better than not saving at all. Alternatively you can also use an allowance system for everyone in the family. This system works the best when not everyone in the family is on the same page on signing up the saving goal. An allowance system for kids, and also husband and wife, gives each of the family members a personal space allowed by the allotted money which can be accumulated on an individual basis for a bigger individual spending need.

    Savings can be done in various forms, not necessarily in your bank account. You can also save by paying down your mortgage debt under the regular amortization schedule, if you own a home. The amount of principle that you pay towards the mortgage balance is your true saving. Obviously, if you have those interest-only or negative amortization loans, you won’t be saving anything in your home, but rather may even be building additional debt when you negatively amortize the loan. Often, paying down your mortgage according to amortization schedule is the most practical way of saving, since you need to pay your rent in an alternative case anyway (see Why Is Your Home the Best Investment). Of course, you need to carefully evaluate the decision between rent vs buy carefully in this housing market. If the mortgage payment on a 30-year loan using a 20% down payment is much bigger than prevailing rent, I am not so sure that buying a home will turn out to be a wise decision. To carefully evaluate your personal situation, you can use my Rent vs Buy Calculator and compare whether you will come out ahead financially by buying a home (or investing in a second home).

    Another very good way of saving money is utilize your 401K or IRA account. The money you save in your pre-tax retirement account gets an immediate boost of some 15% to even 45% simply due to your combined marginal federal and state tax brackets. Besides, your money can grow tax-free. Tax consideration is the primary benefits for pre-tax accounts. Unless you have very substantial assets in the pre-tax accounts, and that you’re expecting a higher tax rates than your current year tax rate, otherwise, most of the time, you could take tax advantage and build up your pre-tax assets. Roth IRA is a good alternative to consider when you don’t want to contribute to your 401k/IRA.

    At last, you should begin saving as soon as possible. When you just got your first significant paycheck from your first job, you may be celebrating your financial independence, and tempted to spend it all. But wealth must be accumulated, and accumulated through time. It’s obvious that if you are only 5 years to your retirement, and you just started saving for it, it’s simply too little too late. I’m not going to be a cheer leader for you. That is just the cold and hard truth. Definitely start early. Stages in life often don’t give you second chances to go back in past to save your money. Demand for spending your income will simply keep growing without stop. It’s always better to have money in the bank, than worries in the head.

    In summary, I advise (See my comments too for the mathematical version)

    1. Save as much money according to your own financial situation. Use short-term saving goal for smaller steps forward, and/or an allowance system if you need them.
    2. Save money in your home by paying down mortgage under a regular amortization schedule.
    3. Save money in your 401k/IRA accounts to take advantage of the tax benefits.
    4. Start saving as early as possible.

    At last, you need to do any longer term financial planning for your saving goal or retirement needs, you can try my Saving Goal/Retirement Calculator. The calculator is for realist, and may depress you with the cold facts. But that’s where the next article comes in, My Advice To Preserving Wealth in 30s thru 50s, hopefully to give you some tips on investing to combat inflation.

    P.S. The number of links to my own posts may seem excessive. But it simply shows how important I think savings is to one’s wealth.

    Posted in Frugal Ways, Miscellany, Retirement | 6 Comments »

    Roth IRA vs 401k/Traditional IRA

    Posted by Frugal on 14th July 2006

    The primary reason for putting money into 401K or traditional IRA account is for the current tax benefit.  However, if the current tax benefit is small, it may not make a lot of sense to stuff money into your IRA account.  Obviously, we don’t know what the future tax rates will be, but my best guess is that it will be higher, if not much higher than today’s tax rates & brackets.  The reason is that the coming dues of social security & medicare services will simply drain the tax revenue base, and will require raising tax (and lowering benefits and probably print more money) to cover any shortfalls.

    If you’re not paying much income tax, or your marginal tax bracket is not that high (below 20%), I would actually consider not saving in your pre-tax accounts, but instead saving those money in Roth IRA.  A Roth IRA is an IRA that you pay tax now, but don’t pay tax later on the earnings.  Comparing Roth IRA to individual IRA, it has a couple of benefits like no forced withdrawal, nor an age limit on the contribution.

    While it may be extremely time-consuming to go over the 100+ pages of IRS Pub 590 document on traditional IRA & Roth IRA, you can use my tax calculator to figure out the contribution limit on your Roth IRA & traditional IRA accounts.  The calculator may not contain all the necessary inputs, but for the most part, it suffices.

    The decision over whether Roth IRA vs 401k/IRA is actually pretty simple.  Excluding the factor of company match on 401k account, for investing in Roth IRA in respect to pre-tax dollars, you will be getting taxed now.  And for 401k/traditional IRA accounts, you will be getting taxed (much) later.  Assuming that the rate of return on investment is the same for both scenario, if the tax factors are exactly the same, then both decisions will come out equally.  If you think tax rate may go up, or your retirement income may be quite high due to all the accumulated assets, then it might be better to just take some tax bite now instead of 30 or 40 years down the road.

    Posted in Retirement, Tax | 13 Comments »

    Geographic Location: How It Affects Your Wealth

    Posted by Frugal on 22nd May 2006

    I am not sure how many people pay attention to the physical location of your workplace, but in the long run, the geographic location often exerts an effect on your money.  As a general rule, salaries are lower at places where living expenses are lower.  There seems to be zero advantages to live in a bigger cities with all the traffic jams and polluted air when all of your additional earnings simply go to taxes and higher expenses.  However, zero advantage is only true if you rent, and also if you cannot save any money.  In other circumstances however, higher earnings with higher expenses is advantageous for the following reasons:

    1. If you are able to make life quality sacrifices, you will be able to save more money simply because the total amount of your expenses is bigger in cities rather than in countryside.  Cutting 10% out of a $2000 budget is $200 while cutting 10% out of a $1000 budget is only $100.
    2. If you are able to buy a home (in a normal housing market, where mortgage payment is closer to the prevailing rent), all of your higher rent money now goes into paying off your home.  Now at the end of the 30 year mortgage term, instead of paying off a $250K home, you pay off a $500K home instead.  Your networth in housing assets over a 30 year period is now twice as what it would be.
    3. In a big city, there are other side financial benefits in terms of more career and networking opportunities besides your regular job.  And if your wife works, she can also have better job opportunities.

    Here is a couple of circumstances that it will work against you instead of for you:

    1. It is financially worse to live in a bigger city when you are already running up your debt month after month.  Why?  Same reason.  Instead of running up $100 debt in smaller cities, you will run up $200 debt instead.
    2. Buying homes at the height of bubble will hurt you more because the absolute number is bigger.  Especially when you cannot make the mortgage payment, you will lose a bigger amount of down payment (if there is any) that you put into the house purchase.

    At last, one of the biggest advantage of living in a big city is that usually you can move to a cheaper city while maintaining the same living standard, but not vice versa.  Knowing this, you can work in a big city when you are young, and retire at countryside when you are old.  The money that you saved will go much further in countryside for your retirement.  Your wealth actually increases after the move, even though the amount of your money doesn’t change.  The wealth effect is much bigger if you are willing to consider international moves.

    Of course, money is not always the first priority.  But if you are able to tolerate city life, and is willing to make some sacrifices to save more money for later, taking a job in a bigger-pay-bigger-expense city is probably good for your money in the long run.

    Posted in Miscellany, Retirement | 1 Comment »

    Stages in Life & Retirement Planning

    Posted by Frugal on 18th April 2006

    Most people when they finally get out of school and start their first job, are so happy with their financial independence and the first paycheck, that they splurge the entire paycheck, if not more.  Few people think so far ahead about the next stages in life, of getting married, having a family, and eventually retiring from work.  If one doesn’t plan to have children, then they have plenty of time to save for their retirement.  But if they plan to have children, the best time for saving money is really right after schooling is over, and before having any children.

    For the ease of this discussion, I’m going to assume some simplistic scenario.  Let’s assume that a person named Kevin graduates from college at the age of 22.  For the next two years, Kevin either spends another 2 years for graduate school studies, or simply lives from paycheck to paycheck because of little work experience which leads to lower salary.  And after age of 24, to age of 30, Kevin develops the career, and gets married.  At about the age of 30, Kevin has his first child.  The first child goes to all the levels of schooling, and graduate from high school after 18 years.  At that time, college expenses will start to kick in when Kevin is age of 48.  Assuming that Kevin has two kids, separate by 3 years in age.  So for the next 7 years, Kevin will need to help out college expenses for his kids.  Once it’s over, Kevin is 55, and has another 10 years of working & saving money until his planned age of retirement at 65.

    Now, let’s look back at the timeline of Kevin’s life in regards to earning and saving potential:

    1. From 0 to 24: it’s pretty much zero.  At the end of 24, Kevin may have some or a lot of college debt.
    2. From 24 to 30: this is a time that he can potentially save some money (either towards paying down college debt, or just simply saving).
    3. From 30 to 48: Kevin’s earning may grow with experiences, but his expenses probably go up as kids grow up.  Let’s assume that the increase in earning is offset by the increase in expenses.  Actually in reality, expenses are a lot higher for the beginning years because the wife cannot go out to work.  If the wife goes out working, the preschooling or daycare expenses may take up all of her paycheck.  Either way, you end up with less (retirement) savings per husband and wife.
    4. From 48 to 55: I think we can safely assume that the saving will be zero or negative if Kevin decides to pay the majority of the college expenses for his children.
    5. From 55 to 65: This is another good 10 years of earning and saving, especially with Kevin’s long time work experiences.
    6. From 65 to 90: That’s 25 years of living expenses that need to be saved up (for both husband and wife).

    So you want to tell me when Kevin can save for his retirement?  To err on the conservative side, and for simple discussion, let’s assume that Kevin’s investment return is only on-par with inflation rate.  So in terms of buying power, what he save every year will simply be what he can spend later.  Depending on the ratio of Kevin’s annual saving to Kevin’s annual retirement expense, the entire retirement picture can look very different.  If we assume that the sum of Kevin & his wife saving is about the same as their retirement expenses which will probably be more than $30000 every year, we can simply count the number of years of savings to find out how many years they can retire.  And that’s 6 years from 24 to 30, 18 (or probably less) years of savings from 30 to 48, and 10 years from 55 to 65.  That’s total of 34 years of savings for 25 years of retirement.  Boy, I haven’t counted the college debt at the time of graduation, and I forgot about buying a house to live.  But for the house, I would also count the housing equity as part of your saving, more in terms of the mortgage that you have paid down, and less in terms of equity due to the current high housing price.  So you can “keep” part of your saving in the house, and reverse mortgaging your equity at the end.  It’s almost like another bank account.

    So with ratio of 1, that’s 34-25 = 9 years extra savings, either for your heir, or for your margin of errors, such as discounting the first 5 year savings when the kids are 0 to 5, or discounting for negative saving years when they’re in college.  Now, if you have spent thru your paycheck from 24 to 30, you have just made your margin of errors to be pretty close to zero.

    For singles, the scenario is much better.  There are no kids to raise, nor kids’ college expenses to pay.  All the increase in salary earning can go towards extra saving (& inflation), not counting the extra 7 prime years of age 48 to 55.

    As for myself, my current saving rate is about $45K, and my estimated retirement expenses are about $31K, summing from my current budget, plus doubling the travel expenses and tripling the medical insurance and doubling the car insurance, and subtracting out any direct kids’ related expenses.  I also add in property tax.  My saving to retirement expense ratio is slightly better than 1, at almost 1.5.

    If you want to put in all the details of your retirement planning, including the inflation rate and investment return, existing asset and liability, you can use my retirement calculator.  You can use it to estimate when you can retire.  It’s what I use personally, and it’s very comprehensive, yet simple.

    Bottom line, it’s never too late to start saving now.  It is far better to have some savings set aside already, then to worry about whether you can hit your retirement saving goal in time.

    Posted in Miscellany, Retirement | 2 Comments »

    How I earn extra 1.45% return without risk in my 401k account

    Posted by Frugal on 13th April 2006

    The annual 401k contribution limit is $15K in 2006 now. Every year I always contribute to the max allowed by the law. My company allows the worker to contribute up to 60% of the salary. 60% of my salary at about $100K is $60K, far exceeding over the $15K annual limit. At the first thought, one would think that 60% is probably for the people whose salary is around $25K, but choose to crazily contribute 60% of the income into 401k account. Obviously, I don’t know of anyone who can live on a $25K – $15K = $10K pre-tax income. But after a little contemplation, I foud out this trick of earning extra 1.45% return without any risk in my 401k account.

    Here is how I do it. I simply contribute at the maximum possible rate of 60% at the beginning of every year. My investment choice is usually cash/bond at Fidelity which is yielding about 3.8% APR. Now if you look at the following comparison table, using 26 bi-weekly contributions:

    pay#

    balance of regular contrib.

    upfront contrib.

    balance of upfront contrib.

    1

    576.93

    2,307.69

    2,307.69

    2

    1,154.70

    2,307.69

    4,618.76

    3

    1,733.32

    2,307.69

    6,933.20

    4

    2,312.78

    2,307.69

    9,251.03

    5

    2,893.09

    2,307.69

    11,572.24

    6

    3,474.25

    2,307.69

    13,896.85

    7

    4,056.26

    1,153.85

    15,071.01

    8

    4,639.12

    15,093.04

    9

    5,222.83

    15,115.10

    10

    5,807.39

    15,137.19

    11

    6,392.81

    15,159.31

    12

    6,979.08

    15,181.47

    13

    7,566.21

    15,203.66

    14

    8,154.20

    15,225.88

    15

    8,743.05

    15,248.13

    16

    9,332.76

    15,270.42

    17

    9,923.33

    15,292.74

    18

    10,514.76

    15,315.09

    19

    11,107.06

    15,337.47

    20

    11,700.22

    15,359.89

    21

    12,294.25

    15,382.34

    22

    12,889.15

    15,404.82

    23

    13,484.92

    15,427.33

    24

    14,081.56

    15,449.88

    25

    14,679.07

    15,472.46

    26

    15,277.45

    15,495.07

    Do you see how I end up extra (15495.07 – 15277.45) / 15000 = 1.45% at the end of the year? After the year is over, all the money in both cases will be earning at the 3.8% APR. However, by simply paying myself first before IRS every year, I end up getting extra $217.62 or 1.45% yield every year. I have been doing this for several years now, and IRS has never complained (since my 401k account gets to the money first). Certainly this strategy is not for everyone. There are three problems with this:

    1. You need to have a sufficient cash reserve in the beginning of the year to cushion the lack of after-tax money coming in.
    2. Your contribution now is not at the even rate, and therefore, if you choose to contribute to other investment choices, you have extra risks of getting into market at the wrong time (or right time for that matter). Or you can phase in your contribution dollars evenly back into the market yourself.
    3. If your company has 401k match, it is possible that you may lose some match dollars with this uneven contribution rate.

    In any case, this shows clearly the advantage of paying yourself first over the tax man (especially if you are a business owner). You can also appy the same principle outside of the 401k account. On the W4-form, you can reduce the paycheck withholding amount in the beginning of the year, but then pay extra at the end of the year to avoid underpayment tax penalty. I use my tax calculator near the end of every year to underwithhold a little bit throughout the year, but catch up with extra tax payment at the end of year. But of course, in that case, your extra dollars may or may not go as far because although the total amount is not limited to $15K, whatever extra money that is earning returns needs to be taxed (at some 20 to 40% marginal tax bracket) unless you put the extra money into your Roth IRA or (spousal) IRA accounts. So don’t delay your contribution to Roth or regular IRA accounts until the April 15 of the next year. You pay yourself extra one-time return by contributing on Jan 1st of that tax year which is 1 year and 3.5 months earlier than contributing at the last minute. And if you do this every year, those extra one-time returns are not a one-time event, but a consistent annual extra return dollars that you pay yourself.

    Posted in Retirement, Tax | 18 Comments »