Frodo’s Long Walk to … Retirement

“I will take the ring to Mordor, though, I do not know the way,” said Frodo to the council, before setting off on an epic adventure.  “I do not know the way” is also a common sentiment among many of my friends when it comes to retirement.  I also know a few fellow millennials, and some others with a little more gray in their beards, who favor Frodo’s initial reaction to the Ring when it comes to thinking about retirement: “We’ll put it away.  We’ll keep it hidden and we’ll never speak of it again!”

We all know what we want (to retire with enough money that Smaug himself would be tempted), but may Gandalf help us, getting there is confusing.  So, whether your goal is amassing a hoard of gold worthy of a dragon, or getting rid of an evil Ring (i.e. work) as soon as possible, here is a blog post about some of the tools and tricks to get you on your way.  Also, just as a heads up, this post is geared towards those of you with employer provided retirement plans.  In another post I will cover retirement options outside the employer-based plan.

First, start early, because it’s all about compound interest.  It’s easy to forget about retirement when you are in your twenties, but in many ways, these are the most important years of our lives for retirement planning.  Just check out this chart, in which assumed you save $100 a month, every month, until retirement age at 65.

Age Years of Investing Final Amount at Age 65 Difference from 1 Year More of Saving
22 43 $299,163 $0
23 42 278,473 -20,690.00
24 41 259,133 -19,340.00
25 40 241,059 -18,073.42
26 39 224,167 -16,892.58
27 38 208,281 -15,886.00
28 37 193,627 -14,654.00
29 36 179,838 -13,789.00
30 35 166,951 -12,887.00

If you save just $100 a month, every month, starting at age 22 when you leave college, for 43 years, until that golden age of 65, you will have accrued $299,163 (assuming 7% yearly return on your investments, which I do in the calculation here, not because that is what will actually happen, but to demonstrate the power of compound interest).  If you wait just THREE YEARS, and go ahead and invest $100 a month until you are 65, that number falls to $241,059.  That’s a difference of over $56,000!  By not putting away that money for retirement, you would only have an extra $3600 in your bank account by age 25 (3 years of saving $100 a month), and would lose out on $56,000 on the back end.  If you wait until you are thirty, because happy-hour, and takeout, and that awesome TV to watch The Return of the King on, the final is only $166,951.  That’s over $132,000 less than if you started saving at age 22, and over $74,000 less than if you started at age 25.  My point is, start as early as possible and let compound interest do its work.  If Frodo had waited any longer to leave the Shire, the Ringwraiths almost certainly would have caught him.  Don’t let that happen to you.

Now, how do you get started?  If you work in the private sector, your employer provided retirement plan is usually called a 401(k); if you’re a teacher, or work at a non-profit, it may be called a 403(b).  If you’re in the federal government’s it’s called the Thrift Savings Plan.  Think of each as your horse.  It’s not some scary investment thing, it’s your tool that will bring you safely to Rivendell ahead of the Black Riders.

There are four main things you need to think about with your retirement plan.

1) What does your employer match?  Most employers will match whatever you put away into your retirement account, up to a certain point.  Employers like to make this more complicated than a dwarven map. Don’t ask me why.  Some give 10% of your income after the first year; some match 3%, then half of the rest, up to a certain amount. Don’t let a complicated system throw you off course—the Fellowship eventually made its way out of Moria too.  Start with just finding out how much they match up to, and then putting that amount away.  Think about it: it’s really just like giving yourself a raise.

Example.

You make $50,000 a year.  Your employer is willing to match up to 5% of the income you place in your retirement account.  If you put no money away into your retirement account you get paid $50,000 a year.  If you put 5% away ($2,500), your employer will give you another $2,500 for your retirement account to match that.  Congratulations!  In one year, you earned $52,500, and managed to save $5,000 of that for retirement.  Add in how taxes work, and the advantage is even greater.

2) When does this all vest?  Vest simply means: you get to keep it.  Some employers will only allow you to keep all the money they give you in their matching program if you’ve worked at the office for a certain amount of time.  Keep in mind, they can never keep what you yourself put away.  If they do, run away and call the police.  But, say your employer matched 5%.  They may require you to work there for a certain amount of time before you can keep all your matched money.  After 1 year, if you leave, you may be able to get just 50% of what they gave you in the match program, but will get to keep all of it if you stay for two years.  Don’t let vesting change your career plans, but keep it in mind.

3) The strength of your plan.  This is a little more complicated, but basically you want a plan that has low costs, with diverse types of investments.  Low cost, in the investing world, means a fee of (way) less than 1%.  Diversity, generally, means stocks, bonds, REITs, and then different types of stocks and bonds.

4) Lastly, in general, every time you leave a job, roll your retirement account over into the new account your employer is offering, or, if you don’t like that plan, open up an IRA with an agency like Vanguard or Fidelity.  Often, employers will start charging you large fees to keep a retirement account open with them once you no longer work for them, although this rule isn’t absolute (no one Ring to rule them all).  For example, the federal government’s Thrift Savings Plan has low fees, and that won’t change if you leave the government.  But at the very least you need to check, and it’s usually safer to roll it over unless you have a good reason not to.  Avoid those fees at all costs.  Remember what adding $100 a month for just a year or two can do, over the course of twenty or thirty years? Well, think about what $100 a month in fees can do and the difference it will make to your retirement after twenty or thirty years.

And finally, remember, you’re not in this alone.  Frodo didn’t make it to Mordor alone, and neither will you, so create your own Fellowship.  Whether it means talking to friends, parents, or a financial advisor, get some help in charting your own course.

One last thing.  In the name of the King of Gondor, do not take money out of your retirement account before you are 60, or cash out the account when you change jobs, unless you know exactly what you are doing.  Chances are, the fees, tolls, and penalties you will pay will make it more worthless than a shortcut over Caradhras.

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