Start the Decade Off Right: Invest For the Future
With new technology becoming available to consumers every day, like 3-D high-definition televisions, it certainly feels like I’m living in the future. How did we all survive without such marvels as wireless internet, video games that react to movement, GPS, text messaging, and video on demand? In ten years, we could as easily be wondering how we functioned in the early twenty-first century without flying cars, time machines, and cellular phone brain implants.
While it may feel like we’re living in the future, we’re not. Although it’s very tempting to focus purely on what is needed right now, this philosophy could set anyone up for financial failure. At the beginning of a career, it’s not difficult to fall into this trap. Starting salaries are not always large, and these days people are often well aware of how their salaries compare with those of their colleagues. This contributes to the feeling that when you’re struggling to afford the basic necessities, saving for later is impossible.
When I graduated from college, I worked at a job that was fulfilling in many ways other than financially. I wasn’t paid enough to be able to eat, afford a normal rent, and commute to work. Saving for the future didn’t even enter my mind. Even when the small non-profit organization established a 403(b), I couldn’t conceive how I could send any portion of my salary to anything other than the “present me.”
After some time I realized I wasn’t thriving financially and I educated myself about money. By the time I started my next job, I knew I had to think about and plan for the “future me,” even if it meant temporarily making some sacrifices.
Why save for the future?
A few weeks ago, Outlaw made an interesting argument about why it’s better to focus on the present and ignoring the future. I don’t agree, but there are some valid points:
- You should only plan for what is likely. If your genetics indicate you will not live a long life and if you have no purpose for accumulating money other than using it for yourself, then by all means, live every day like it is your last and spend away.
- The purpose of money is for it to be used, not to be sitting in a bank account. This is why I believe statements like, “My goal is to have a net worth of ten million dollars,” are not real goals; they don’t explain anything.
The basics for you and your family are not fully covered until you think about future needs. Being able to enjoy what life has to offer in the present is a luxury. In a perfect world, we could do both — invest for the future and use money to better ourselves today.
How to invest for the future
I often hear that it’s better to just get started investing as early as possible, to take advantage of the power of compounding returns, and that’s better to just do something rather than taking the time to do something right. Voltaire wrote, “Le mieux est l’ennemi du bien,” and this is often interpreted to mean that obsession over doing something the best way prevents any action at all. This is further extrapolated to rationalize not performing due diligence before making an investment decision. In other words those who follow this philosophy might say it’s better to get into the stock market now in the easiest and quickest manner and worry about specific investments later.
There’s some truth to that, and that’s why many companies automatically enroll new employees is 401(k) retirement plans. But the default investments may not be ideal. So here is what you need to do now to save for your retirement or the future in general.
Invest in your 401(k) but choose the best options. Many 401(k) plans let you choose a risk profile, like “aggressive” or “conservative,” and they do the rest. If you are aiming for bien rather than mieux this is a good start. If your 401(k) offers a low-cost broad index fund, this may be a better investments than the underlying funds in an automatic portfolio based on a risk profile. With a 401(k) plan, your income is reduced by the amount you invest, but you will pay income tax when you eventually withdraw your money during retirement.
Many companies that offer 401(k) plans also increase the benefit by matching your contributions up to a certain percentage. This is “free” money so you should try to make the most of that benefit. Nothing is truly “free.” Many times you have to work at a company for a certain amount of time before your employer matching contribution becomes truly yours. Corporations need to use delayed rewards like these to help retain good employees who might be talented enough to find more creative ways to earn income.
Maximize your Roth IRA investment. It’s hard to know what income tax rates will be in the future, but with the way the economy is now, it’s not unreasonable to expect tax rates will be higher by the time you retire. Roth IRAs are optimized for that assumption compared to pre-tax 401(k) plans; you pay your income taxes now at what might be lower rates than those later.
While a company creates your 401(k) choices, you are free to invest in just about anything for your IRA. My IRAs are mostly held at Vanguard where I can choose from a selection of low-cost index funds.
Maximize your 401(k) contribution. After you’re investing the full amount to your Roth IRA you can turn around and look back at your 401(k) contribution. You can increase the amount you defer to your retirement plan up to the contribution maximum mandated by the IRS or your employer.
These are only some suggestions. Not everyone has access to 401(k) plans or 403(b) plans. There are other investment options like SIMPLE IRAs, traditional IRAs, and non-retirement accounts that can be used efficiently to prepare for the future.
The future is not just retirement
There is more to the future than quitting your job and moving to an “active adult community.” Think about what you might want five, ten, or twenty years from now. If a house is in your future, you should save for a large enough down payment. But if you plan on making the purchase within ten years, you may want to invest outside of the stock market as you never know when the next market crash will arrive. Bad timing could wipe out your savings.
Don’t forget to think about people other than yourself, particularly those in your family who rely at least partly on your income. For example, you may want to invest for future education for your children.
If you think you might need the cash for a goal upcoming within a year or so, high-yield savings accounts, high-yield alternatives, or even laddered certificates of deposit (CDs) provide the liquidity you need.
If your money is limited, the more aggressive you need to be. For example, Suze Orman suggests investing for the long term in stocks. That’s good advice for most of her audience. You’ll find that she invests only 4 percent ($1 million) of her own portfolio in stocks and most of the rest in bonds. Even a modest return on those bonds provides her $1 million in annual income. With a net worth like that, Suze Orman can afford to be more conservative.
Find the right balance
All this planning for the future is a smart way to reduce the possibility of struggling later in exchange for living like tomorrow will never come. Life is short. The time we have with our family and friends is limited. Before you know it, life has passed you by. There has to be an optimal balance between saving money for the future and using money now to make the most our of life.
As I mentioned above, being able to do both or to find balance is a luxury. Many people throughout this world struggle to afford a minimum amount of food every day. They are not thinking about retirement nor are they thinking about their next family vacation. Most readers of Consumerism Commentary are exceedingly lucky to have been born in a prosperous time in an advantageous location. Those of us earning money have the ability to invest for the future. There is no reason for us to sacrifice our future to live for today or to sacrifice an enjoyable life now for the sake of our future as long as we take a sensible approach to balance.
This article is part of a series called Start the Decade Off Right on Consumerism Commentary. Previously: Pay off debt, open a high-yield savings account.
Article comments
Troy, thanks for the props, but I think Flexo has some good points — guess we’re kind of like the yin/yang when it comes to retirement ideas, I suppose — you need both or things go downhill quickly.
“Starting salaries are not always large, and these days people are often well aware of how their salaries compare with those of their colleagues. This contributes to the feeling that when you’re struggling to afford the basic necessities, saving for later is impossible.”
This is really important to remember. When you’re making $40k a year it is very easy to dismiss saving/investing/retirement options altogether, because you’re barely scraping by.
Then when you’re making twice that, maybe you upgrade to a slightly less dire apartment, or lease a new car, and then you can make the same argument about barely scraping by…
Unless you slash your costs at some point (preferably very early on so it becomes habit) you could conceivably be one of those sad people who makes $500k per year and has nothing to show for it.
Like the former i-bankers who now work at Starbucks. They should have been saving, at some point, before their luck turned. Almost as sad as lottery winners who go back to quiet poverty after 18 months of reckless spending.
I always thought that plans should be find a way to lower fixed expenses way down.
John DeFlumeri Jr
I agreed with Outlaw in that previous article last decade. And I still agree today.
And he didn’t say to ignore the future. He said don’t focus on it at the expense of your present. And I fully agree.
This doesn’t mean you should only focus on today. OR only on retirement. It means you should weigh the opportunity cost of every dollar and every action. Saving has a cost. So does spending. And each has risks.
The reason I rail on traditional “retirement plannning” is because in it’s typically recommended form it violates extremely important tenets of personal finance.
Most recommendations, yours above included, espouse a variation of enrolling in the company retirement plan, or an individual IRA plan of some type. Slam 10-15% automatically…”you won’t even notice” type advice and set it and forget it.
Crock pot investing.
Here is the problem. The number one rule in personal finance is to pay attention.
IT applies to ALL parts of finance. Pay attention. To what you are doing, how you are doing it, when you are doing it and why.
Wealthy people, successfull people pay attention to their money. It isn’t automated and it isn’t on autopilot. We check on it. Watch it. Control it. Move it. Adjust it. All the time.
But traditional retirement planning encourages you to not pay attention. Forget about it instead. And it also violates the second most important item in personal finance.
Control.
Put your money where you can control it. Where you understand what is going on. What you understand.
Mutual Funds are the opposite of contol and knowledge. Most people don’t have a clue what their fund invests in, and have zero control over those investments. And they pay a nice fee for that lack of contol and knowledge. Isn’t that great.
Buying individual stocks at lest affords control. But most investors still don’t know what they are doing. They don’t understand the stock. And they get creamed.
Investing is a zero sum game. For every buyer ther is a seller. For every winner there is a loser. Guess who the losers are. Joe average and his retirement portfolio. Same with casino’s. They didn’t get built off the winners.
Why not put your money in something you know. Something you control. Something like
Your own business, or classic cars, or antiques, or rental property, or land, or commercial investments or a myriad of other things.
Example. Parents want to buy a lake home in 5 years when they retire. They are saving fervishly in their IRA’s for the place. Putting in $1000 per month plus heavy 401(K) contributions. They plan to take it all out in 5 years and buy their dream. Typical PF advice would be on the allocation of mutual funds for thaose 401(k)s and IRA’s for the next 5 years.
Here is the advice they should get. Forget Mutual funds. Stop contributing to your retirement plans.
Buy the lake home now. Get a loan with a $1000+ payment. The interest is tax deductible, just like the IRA/401(k). You get to buy at cheaper prices now, and enjoy using it for 5 years. The appreciation on the home is non-taxable, and there is no lump sum withdrawal tax like there would be on your retirement plan.
Now they understand where their money is going. And they control it. They control the upgrades. And they get to enjoy their present.
Remember what outlaw already knows. Your present is guaranteed. Your future is not. But that future is dependent on your guaranteed present, so don’t sell it out for your future self. You might be real surprised what your future self thinks.