Help me start before it's too late!!

[Guest Jason W Harley]

I'm 22 and preparing for marriage in November. Between my wife and I, we will make +/- $75,000.00 a year. I'm looking for a step-by-step procedure in planing for retirement. With so many options out there, what is the best way to go. Is Roth all they say it is?? Also, does anyone know of a way become wealthy while I'm still young.

[John G]

1. Look at my responses to "Young whippersnapper..." Q by Jamison for most of your questions.

2. Congratulations for thinking ahead. My opinion is that you can never rely on others to consistently act in your best interests. Investing is no different then other aspects of life, you need to educate yourself. Read the March issue of Consumer Reports on retirement planning and investing. Suscribe to Kiplinger Finance mag. Two hours each month is enough to get you started.

3. How do you get wealthy while still young? If quick means less than 10 years, you may want to read about Bonnie and Clyde.

But seriously, outside of inheritances legal wealth can be "built" with work and time. For some this means lots of education and a profesional job. But even people of modest means can built wealth if they play "good defense", that is they consistently spend less than they make.

Another wealth building group are those entrepenuers who start a business and make it grow. These are the prudent risk takers. I am not talking about Bill Gates; but rather the carpet cleaner with 10 vans, the local restaurant with 4 locations, the women that builds a cluster of 8 self storage sites. You might want to read "The Millionaire Next Door" by Stanley and Danke which while dry does a nice job of explaining wealth building households.

I count about 20 millionaires among my friends. Here is their breakdown: two started a consulting firm in Wash DC, three are senior officers in Fortune 500 firms with huge salaries, another started a economic research firm, one got lots of stock options with a new job and saw the firm get acquired one year later (the only lucky guy, all the options vested immediately), three are 65+ and built their wealth via stocks over four decades. The rest used a mix of 401K, ESOP, matching thrift plans at the company they worked and IRA type investments. Not one of these folks ever had a significant inheritance. Most have technical degrees, Master or PHds in their fields. Only one is a lawyer. The entrepenuers built their first million in 12 to 20 years. Note: no lotteries, no gimics, no commodity trading(sorry Hillary), no penny stocks.

You also will not "get rich" by responding to emails and infomerchials on schemes.

[John G]

A few added thoughts.

If you are serious about building wealth, your very first step is to set aside perhaps 20,000 of your current annual income. You are in the first "build it zone", young professionals in the pre-family period. Sock it away, write a check to yourself each month. Each month. Make it a habit.

Roths are a great mechanism, use it now while you qualify. You also want to participate in any matching tax shelter your employer offers such as 401Ks.

[Guest Jason W Harley]

Thank's for the advice! I've read "The Millionaire Next Door" on the advice of my older brother. It opened my eyes to the difference between "living wealthy" and "being wealthy".

I started working for my fathers buisness before I completed High School. He started the company twenty years ago and had passed it along to my older brother.We generated about 1.5 million in revenue every year. Now we've sold to a larger company so I don't have the stock options I once did. With this new company, they have a 401K plan that matches up to so much. My plans are to put as much in as they'll match in and the rest into a Roth IRA plan.

It seems there's no cut and dry way to become rich overnight. So maybe with a little time and planing, the answers will present themselves.

[John G]

OK, you got the basics on matching. You also can fund your Roth IRA and your wives. You can hopefully tuck more away.

On the wealth front. Your father was on to something, the business ran for a while and was attractive enough to find a buyer. Maybe you should consider striking off of your own if you have the "right stuff". The economy is very supportive. If dad was a successful business person, he probably has a good eye for what traits you have that will work or not work. Ask him about what makes the "right stuff" and what you have and what you may need to develop.

If not your dad, then perhaps you should buy a beer for his best business friends (suppliers, vendors, customers?). Ask for honest advice and their assessment of your + and -.

I would also suggest you start reading Venture, Inc and the other business start-ups mags.

If you are not the kind of person who can strike off on your own, than consider advancing your education to make yourself more attractive.

Good luck.

[Guest jsexton9]

Lots of good advice has already been posted. I would stress two points: 1) Don't put all your investments into retirement accounts; have some accessible money and don't forget the "bargain" money (insurance) in case one of you doesn't make it to retirement. 2) You sound like you're not inclined to spending it as fast as (or faster than) you earn it; but that is a pitfall that deflates many long-range plans before they even get started.

[John G]

Responding:

(1) because you can always take out the contributions to a Roth, putting "all" your money in retirement is never that

(2) insurance? they don't have kids, so except for ensuring future eligibility (a relatively small risk in your early 20s) what is the point? The surviving spouse can still have a career without worrying about daycare. I sure hope you are not talking about insurance as an "investment". When kids come you have about two decades when a term policy may be financially prudent.

[Guest jsexton9]

Insurance is not an investment for oneself. It can be of good use to the survivor, especially if the deceased doesn't stay around long enough to build up sizable investments. Insurance can pay off a mortgage, replace the lost income of the deceased spouse, pay other expenses and costs that can so quickly build up during a final illness (just to mention a few positive points re: life insurance apart from taking care of children). It sounds like John G. may have a natural aversion to insurance, which is very understandable given the misuse it has so often been put to.

As for being able to take money out of a Roth prior to retirement:

1) Currently you can only put $2000 a year into it;

2) It is primarily a retirement vehicle, and taking anything out prior to age 59.5 diminishes its overall benefits;

3) Once you take money out of a Roth, you cannot put it back in, so retirement savings would be permanently damaged.

[John G]

Insurance follow up:

"Final illness" is a pretty low probability for a couple in their 20s, and with both working with the income mentioned it is likely that atleast one has work based medical coverage.

"Final expenses" this means getting buried or cremated... are we so sensitive that we can't just say that? It is an expense, but unless a family opts for the full package it does not need to be a "major expense". Less than 10K for a modest burial and well under half that for a cremation.

"Replace lost income" - when both are working, a single death means the survivor goes back to being single living on their salary. Living on one salary when you are 20 is what about half the country does right now so lets not exagerate the burden.

These are typical emotional arguements for insurance that are part of the sales pitch every agent practices. Yes, there is a modest amount of truth imbedded here. BUT, they vastly overstate the average childless couples needs for insurance. If this couple has even a modest amount of salary based insurance at work, they are probably amply covered.

The major need for insurance comes as they start raising a family and one member stops working. Then the combination of extra cost and reliance on a single salary clearly makes a difference. But, even here you hardly need to pay off the entire morgage to be able to survive.

As someone who has held various insurance policies over the past two decades, I hardly have an aversion to insurance. My advice was targeted to this specific audience: a soon to wed couple in their 20s with no kids.

[david rigby]

Not disagreeing with the prior posts, but I'll add another perspective.

People in their 20s do not need to be focusing primarily on saving for retirement. Most people have different needs at different points in their lives, and saving is no exception to that rule. Sure, put some aside now, but don't put it all in a vehicle which is intended for retirement savings. Put some aside for the shorter term needs, especially saving for a house and college education for children. Yes, I know that there are vehicles that can be used for both, but what I am discussing primarily is the "mindset" of long-term vs. short-term.

Also, don't forget, that you should put some aside to anticipate being a one-earner family with kids. It does not matter if you think that won't happen: odds are very high that it will happen, or that you (more likely, your wife, the mother of your children) will wish it could happen.

BTW, congratulations. Marriage is the basic building block of society. I'm always glad to see others joining in.

[John G]

Pax, I agree with all you said. Thanks for adding some more things to consider.

Savings for buying a house, college for kids and a cushion for what my mother called "a rainy day" are all sensible. The max amount this couple can currently tuck away in a Roth is $4K (2k each) and given their income, hopefully they can do that and more. A general target for a young couple would be investing (Roth or otherwise) atleast 10% of their income. That might be hard for some and easy for others. It surely gets a lot harder 10 years later when you are buying school clothes and thinking of Disneyland.

One way to make investing a habit is to make it a monthly expense like the phone bill, which also means they would be dollar cost averaging.

PS: Marriage takes as much work as you job or investing. My best wishes too. Kathy and I are 20+ years of marriage and perhaps the most important thing is to be able to grow and mature beyond those wonderful early years. [Edited by John G on 08-30-2000 at 01:32 AM]