Apart from doing my taxes, my favorite thing about this time of year is the smug and self-congratulatory feeling I get from maxing out my 401(k). No doubt I am a little nutty about retirement savings, and I feel very lucky and grateful to be in a position where I (1) have a 401(k) and (2) have the ability and wherewithal to max it out.
To be sure I don’t take that luck and gratitude for granted, I take it to a bit of an extreme. I make a point to max out my 401(k) as early in the year as possible, a habit I started when I began my “real” (cough cough) career in 2007. At that time, my employer would allow contributions of up to 50% of my paycheck, so that’s what I did. My current employer does not cap contributions, so I’ve opted to contribute 100% of any bonuses and 50% of my salary.
Whaaaaa? Why do I do this?
- I’m impatient. This way I’m done with my 401(k) contributions by summer, so I can rest easy by the lake.
- I’m greedy (when it comes to savings). Contributing such a high percentage of my income forces me into a greater than 50% savings rate, a habit I (mostly) maintain even once I’m done so that I can keep barreling towards FIRE.
- I like getting a 50% raise several months into the year, every single year. Ok, it’s not a raise, exactly, but having a little more cash on hand for the rest of the year can come in handy. I don’t increase my day-to-day spending after my 401(k) contributions are done, but it’s nice to have a cushion for summer home improvement projects and travel.
- I believe in investing early. To put it eloquently, markets go up over time, so the more time your money has to go up, the more up it goes. There are different philosophies about investing lump sums at once v. dollar-cost-averaging (investing the same amount over a longer period of time to average-out market fluctuations) and there is no question both methods work well. I dollar-cost-average my non-retirement investments by automatically investing a certain amount with every paycheck (an amount that goes up once my 401(k) is done!), but for long-term retirement savings, the earlier in the better. (If in doubt, check out this calculator.)
- I can put my FU money to use guilt-free. On days when I’m feeling like I should just walk away from my job, one thought that holds me back is failing to take advantage of my great 401(k) plan. If I can max it out early in the year, that restriction evaporates into several months of potential no-strings-attached freedom.
So what’s the first thing I do when I’m done with my 401(k)? Max out my Roth IRA, which I’m pretty sure stands for I’m Really Anxious about retirement.
As an aspiring professional athlete,* one of my favorite kinds of stories is the kind of story about professional athletes who do amazing things with all their professional athlete money. Amazing things like completely ignoring it.
Last year, my favorite story was about Daniel Norris, an MLB (that’s baseball, goofball) pitcher who lives in a van. A van!
This year, hands down, the best thing to come out of the NFL (football!) is from my neck of the woods, now retired and truly FIREd** Seahawk Marshawn Lynch. Apparently he never spent any of his NFL salary and instead lived off side gigs like product endorsements and saved money through standard frugal favorites like avoiding fines by performing at press conferences.
So now he’s retiring at age 29 with a cool $50 million in the bank. Assuming a conservative 4% withdrawal rate, that leaves him $2 million per year to live on without ever touching his principal or earning another penny. That’s a lot of Skittles!
I’m hoping to do something similar, though maybe on a smaller scale (?). Just as soon as my product endorsement checks start rolling in . . .
*I am not an aspiring professional athlete.
**FIRE = Financially Independent / Retired Early. Not “fired” as in terminated from employment. Duh. Nobody would fire Marshawn! Sad to see him go, but I support his decision 12,000% and wish him nothing but the best. And I really hope he reads this post.
A few days ago I had a conversation with a fellow finance nerd-friend about asset allocation. She asked how I make my investment decisions — I pointed her to my reading list and explained my general approach that I’ve explained here. Following that conversation, I realized I am overdue for a checkup — while I have my 401(k) set to rebalance automatically, that’s not true for my brokerage account or Roth IRA. I don’t believe in following my investment performance on a regular basis, but occasional check-ins are important to make sure we’re still on track. And not lying to our friends. It was keeping me up at night (not really), so I decided this would be a good time to see if I what I said I was doing was really in fact what I was actually doing. Continue reading Asking to Assess My Asset Assumptions
I’ve been distracted recently and haven’t given this blog the attention I’d like, with several other creative projects (more to come on this!) taking priority, plus the taking-longer-than-wanted-but-not-unexpected basement refurb. Thankfully, though, my finances are robotocized (that’s a word, I swear) and I don’t have to worry about making sure I’m on track.
So how do I robotocize my financial life?
- Direct deposit. Did you know you can set up a direct deposit to multiple accounts? I only figured that out recently. I get paid every two weeks and set up direct deposit with my employer. The general amount I need for living expenses (or at least what I budget) is deposited to my checking account and the rest goes to my savings/brokerage account at Schwab.
- Automatic bill pay. Many banks and credit cards offer options to set up automatic bill pay through your accounts directly. I’ve taken a more piecemeal approach and set up automatic payments through each billing account, but now I don’t ever have to worry about making sure my bills are paid on time, including everything from my mortgage and car insurance to electricity and gas to state and federal taxes to full payment of my credit card balances every month.
- Automatic investing. Once my paycheck gets deposited in my Schwab brokerage account, a few days later I have a semi-monthly automatic purchase of $300 of a total stock market index fund. This means I invest $600/month without even thinking about it. Through my employer, I also have my 401(k) withdrawal with every paycheck — I front load it with a whopping 50% of my paycheck at the beginning of the year.
- Automatic dividend reinvestment. Whenever I buy a stock or fund, I select the option to automatically reinvest dividends — free money to invest before I even know I have it.
- Automatic rebalancing. I have my 401(k) account set to automatically rebalance once a year. This ensures that the asset allocation I’ve selected will stay generally the same from year to year — in a nutshell, if I have a great year in stocks, I’ll shift some of the gains over to bonds, and vice versa, ensuring maximum diversity for maximum growth over the long haul (there’s an important life metaphor in there somewhere!).
Easy peasy, nice and breezy! Now if only I can find a way to robotocize the rest of my responsibilities …
I was reading an outdated New Yorker at a doctor’s office recently and came across this column about electronic trading and the rise of the new robot overlords who control our every financial move.
OK, maybe it’s not quite that dramatic, but it provided a good, nugget-sized summary of why an individual trying to time the market or trade individual stocks is almost never going to succeed based on anything other than dumb luck:
In the popular imagination, investing is about economic fundamentals. Investors scrutinize companies, weighing factors like cash flow, product lineup, and merger plans. They keep in mind general stuff like interest-rate hikes and what’s happening to the dollar. But most trading these days has nothing to do with any of these things. Instead, it’s all about what the market is going to do in the very short term—often a matter of milliseconds. Most of this trading takes place too fast for humans to be involved, so the decisions are left to computers.
Market swings are generally driven by algorithms, computers, and large-scale institutional traders (think CalPERS, the retirement system for the state of California and largest pension fund in the U.S., which manages over $300 BILLION in assets; that’s more than even Donald Trump!). As an individual, I know there’s no way I can keep up — while I might do well occasionally, on average I am never going to beat the market, which is why I focus on trying to match it instead.