Practically, what tips do you have for young people who are thinking about retirement?
I always tell everyone, there is a special Your Rich BFF method: you need to STRIP. Everyone says, “Oh, did I pick the wrong career?” No, strip is an acronym.
S stands for savings. You want to set aside an emergency fund. In particular, I recommend putting your emergency fund into a high yield savings account so that your money waiting for that rainy day earns interest in the meantime. If you are a singleton, 3 to 6 months of living expenses is a good bet. If you are head of household, you have dependents, I would say closer to 6 to 12.
T is total debt. A lot of us have debt – that is not a bad word. It is just a tool. What I say is rank it from highest to lowest interest rate. Make the minimum payment across everything to keep your credit score high. But then any additional funds you have for debt paydown goes towards the interest rate that is the highest.
Up next R: retirement. Take advantage of tax-advantaged accounts through your job. You can also open up an IRA or a Roth IRA.
And then I. This is important; it's not enough to just open those accounts, you actually have to invest. Take the cash that you're putting into those accounts and make investments that make sense based on your risk profile. Target date retirement funds or index funds often make sense.
And the last step is so critically important: P – plan. You don't get to have happily ever after if you do not have a plan. Write down what your goals are, what those milestones are, what you’d like to accomplish, the amount of money it's going to take to get you there, and then back into what you need to do to get there.
How do you protect yourself and those investments from another financial crisis?
It's really important that your portfolio makes sense for how far you are away from retirement.
So when you're 20, yeah, you can be 100% or 90% in the stock market and have 0% or 10% in bonds. When you're 50, it should look almost flipped.
But it really depends on how much you're making and how much you already have. Every single person is a little different.
What about people who are just getting by? How should they prioritize retirement savings?
If they are just getting by, first and foremost we want to try and maximize that income. People always balk when I say this: You need to be asking for a raise somewhere between 10 to 15% every single year.
Ooof.
I'm not saying you're getting it But if you ask for 10 to 15 and you get eight, that's good, because eight is still going to help keep you above the inflation rate.
Retirement and savings in general are often presented as this sacrifice. You're going without your fancy groceries now so that future you can go on cruises and golf and do whatever it is that people do when they're retired.
JQ's moving to Naples in her retirement!
But how do you find that balance? How do you prioritize those things?
I think it's about providing yourself with a life that you are happy with today while also thinking, “Hey, it's not like saving for retirement means this money goes into a black hole.” You still get to spend it just later.
You're not just setting this money aside and then getting that same number back in retirement. When you start investing your money, when it has a little bit of room and time to grow, that money gets to work really hard for you. And so you might put in $100,000. That $100,000 could be a couple million dollars in retirement.
