Savings, Investments, Retirement Stats and Food for Thought

Christcorp

10-Year Member
I had a few minutes of free time, and the recent threads on investments, savings, etc. got me thinking. I've also had some discussions recently with some others about savings, investments, and retirement.

This is one of those: "I wish I'd had known THEN, what I know NOW". Scenarios. In other words; for you appointees, cadets, and young officers; this is one of those times where you can learn from others. You DON'T have to TOUCH the stove to find out it's hot. Others have already TOUCHED IT. You don't need to TEST Meth to know it's bad for you. You can learn from others.

Anyway; here are some quick STATISTICS. "Accurate as of about 6-8 months ago".

PLEASE READ THE FOLLOWING, AND THEN THE PARAGRAPH in Bold at the bottom A FEW TIMES!!!
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1. MEAN Average of Retirement Saved in the USA is $95,776 . This might sound good, but it's misleading because many have $0.00 and some have a lot.
2. The MEDIAN Average: "The MIDDLE from high to low numerically, is $5,000. That's right. The median retirement saving in the entire USA is about $5,000.
3. Those ACTIVELY saving for retirement, the MEDIAN is about $60,000.
**************************************************************
This is pretty sad. But not the saddest.

1. 50% or all savings accounts in the USA only have about $1,000 in it.
2. 34% of all Americans have $0.00 in their savings accounts.
3. 15% of Americans have MORE than $10,000 in their savings.
***************************************************************
You NEED 4 TYPES of Savings:
NOTE: The OBJECTIVE is to NOT be in debt; other than a possible mortgage and maybe a car loan.

1. 3-6 Months of Living Expenses for an Emergency Fund: $15,000-$20,000. Believe it or not, that isn't hard to do. PLUS, because you're guaranteed a job for 5 years, you don't need all of this right away. You can build this up during your first 5 years on active duty. So it will be there if you decide to get out. It's in case you get laid off, car breaks down, emergency leave, hot water heater, etc...
2. Short term savings: This is where you monthly bills come out of, splurging money, day to day living.
3. Large Purchase Savings: This is for saving for a down payment on a house, new car, vacation, etc. It's for an item that is too large to purchase from a single paycheck.
4. Long Term Savings: Retirement, Children's college, Medical assist/saving, if needed, etc...
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The question NOW IS: What percentage of the statistics above, do you want to be in????

I asked you above to read the following PARAGRAPH a FEW TIMES. It's NOT ROCKET SCIENCE. For those with access to the USAA $35K, this example is specifically for you. For those who didn't take the $35K loan, you can still make up for this. Simply put $600 per month into the same scenario.

"Take the $35,000 loan; put it into an S&P500 type Index fund. Make sure all dividends and such are rolled over so taxes are deferred. Let that money sit in there for 40 years; until you are 65 or so and ready for retirement. Even though the AVERAGE RETURN on the S&P500 is around 10-11%, I will be SUPER CONSERVATIVE below with returns."

If the $35,000 is put into the S&P500 type index fund and LEFT ALONE for 40 years;
@8% interest: $849,568.49
@6% interest: $383,510.88

Either way; that's a good chunk of change for retirement. ADD to that, the TSP Savings Plan if you decide to stay in the military; OR the Military Retirement; AND Whatever 401K or IRA or Pension you have from the job you get at age 40-45 when you get OUT of the military (Assuming you stayed in for 20); PLUS.... Add in any Social Security and other savings you may have, and you WILL HAVE ONE HELL of a Retirement.

So, no matter what you think about savings, investing, retirement, etc. If you take the $35,000 USAA loan; @ 0.75%, put it in a S&P500 type index fund, pay it off in the 5 years, ($600 +/- per month), and NEVER TOUCH IT AGAIN...... Even if you're one of the sad statistics above who doesn't know how to invest and save..... You'll still have $400-$800K towards retirement. And that's being conservative. @ 9% interest after 40 years, the $35K will be worth $1.26 MILLION. At 10%, it will be worth $1.87 MILLION. And 10-11% has been the AVERAGE over the last 40-50 years.
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There you go......
"This is your Brain...... This is your Brain on Drugs........ Any QUESTION?????"
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AROTC-dad

Moderator
5-Year Member
Totally agree with Mike.
In addition, it is sooo important to begin saving EARLY.

Because compounding is so powerful, starting early gives you more flexibility later on in life.

Here is an illustration of the importance of starting early and how compounding amplifies your money.

Imagine you start saving at age 25 and consistently save $10,000 a year, but after 15 years at age 40, you need to stop saving for some reason.
Your friend starts saving at age 35 and saves the same $10,000 a year for the next 30 years, until you both retire.

At that point, all else equal, you'll have more money than your friend, despite having put away only half as much.

With time, you can invest less money but have more to spend in retirement

This hypothetical illustration assumes an annual 6% return. The illustration doesn't represent any particular investment, nor does it account for inflation.

Start EARLY!
 

Christcorp

10-Year Member
That's why I prefaced the thread with; if I knew then, what I know now.

I started late. I retired the military at 38 years old. Just bought a house 1 year earlier and only had $10,000 to my name. I busted my butt. 17 years later, today, I paid the house off at 14 years. Maxed my retirement contributions. And invested well. While I'm fortunate to have a good paying job, if I had started investing 35 years ago, I could probably have retired now at 55.
 

USMAROTCFamily

5-Year Member
"Take the $35,000 loan; put it into an S&P500 type Index fund. Make sure all dividends and such are rolled over so taxes are deferred. Let that money sit in there for 40 years; until you are 65 or so and ready for retirement. Even though the AVERAGE RETURN on the S&P500 is around 10-11%, I will be SUPER CONSERVATIVE below with returns."
I'm a huge fan of saving early and continuously until retirement. One point of order, though, is that dividends and capital gains distributions are taxed, even if they are reinvested back into the same mutual fund. Unless of course, it is invested in an IRA or Roth IRA.
 

Christcorp

10-Year Member
There are many ways around this. The easiest is to understand the difference between an IRA and work plans such as a 401K, 457B, or in the case of military members, the TSP. While there is a maximum IRA contribution "Roth or Traditional" of only $5,500, the TSP allows for a maximum contribution of $18,000 per year. There's also other rules about moving other money around, but lets keep this very simple.

Take the $36,000 loan and put it in the bank. Set up your TSP for a monthly contribution of $1,500 per month. That's the $18,000 per year. Reimburse yourself, if needed, for normal expenses from the $36,000 you put in the bank.

AFTER the 2nd year of TSP contributions, you've put in the $36,000 that you basically borrowed. Lower your TSP contributions to a more manageable amount that you wanted to.

This is the EASIEST way to get the money into the TSP (Military version of 401K). Some people do it a little differently. My son took the $35,000, put the $5,000-$5,500 max into a Roth IRA, about $10,000 into CD's. The rest in savings. The next year, another $5,000 into the IRA. And so on for the 4 years until it was all in the IRA. Then, after getting promoted to Captain, set up his TSP. And now, the loan is paid off; he's got a good chunk in the IRA and the TSP is doing ok.

There's lots of ways to do it. The way I recommended by maxing the TSP at $18,000 per year and paying yourself back with the $35K loan in the bank is definitely the easiest and best. However; there are some individuals who SUCK with money. If they have $35K in the bank, they'll probably spend it all. Either way, there's lots of ways to get the money into a tax deferred account so you don't have to worry about interest and dividends.
 

ProudDad17

Member
Thanks for the info; I will be sharing it with my DS who will be starting NROTC this fall. I do have a question though; he is looking to invest some of the money he has received from HS graduation. Not much, probably $500-$1500, but I commend him for looking ahead and wanting to start saving/investing early. What suggestions do you have for this? Roth IRA, mutual find, etc? Can he use gift money to open a Roth IRA and can he use some of his monthly stipend money from NROTC for Roth IRA contributions, since it is not taxable? Just looking for some suggestions to explore further with him.
 

Christcorp

10-Year Member
WHERE money comes from doesn't matter when it comes to IRA's. Birthday money, graduation, cutting grass, a job, etc. Money is money. The only limit is, you can only put in UP TO $5,500 PER YEAR in an IRA. That's ANY COMBINATION. E.g. all $5,500 in a ROTH IRA or All in Traditional, or half in Traditional and half in ROTH, etc. Doesn't matter. Just can't go PAST $5,500.

With a WORK RETIREMENT however, e.g 401K, 457b, TSP (Military), etc. there is a much higher limit. That limit is $18,000 per year. And again, in a work retirement like 401K or whatever, there are many options of investments. Some tax deferred (And you can take a tax break now); some ROTH and you pay the tax now like regular income; but when you take the money out; it and ALL of the interest is tax free.

As for your son; as well as those going to the academies. The truth is: None of them are going to be making much money while there. $1,000 per month for an academy cadet. Not sure about ROTC. Guess it depends on summer jobs or whatever. Point is; in my opinion, it would be better to use any of that money to remain OUT OF DEBT instead of putting it towards a retirement fund at this age. Once the money is in an IRA, 401k, TSP, etc. you can't touch it again without penalty until 59 1/2 years old. With so little income yet at his age, it's better to make sure he stays DEBT FREE.

Now, if during college/academy years, they will have more than enough money for books, food, trips, travel, a car, etc. and they'll still have a considerable amount of left over money....... then investing in an IRA or such is fine. But I would recommend that he use the graduation money in a savings account to LEARN how to budget and live within his means. Add to it as possible to save up for a car, plane tickets to travel, or whatever he needs it for. IRA and retirement plans are better off once he's got a steady full time paycheck coming in.

Just my $0.239394943. (Inflation)
Mike
 

AROTC-dad

Moderator
5-Year Member
WHERE money comes from doesn't matter when it comes to IRA's. Birthday money, graduation, cutting grass, a job, etc. Money is money. The only limit is, you can only put in UP TO $5,500 PER YEAR in an IRA. That's ANY COMBINATION. E.g. all $5,500 in a ROTH IRA or All in Traditional, or half in Traditional and half in ROTH, etc. Doesn't matter. Just can't go PAST $5,500.
This is not quite correct. In order to contribute to an IRA You must have taxable compensation, as defined by the IRS (except for spousal IRA).
Mowing lawns works, a job is good,. Gift money does not.

From the IRS:
Who Can Open a Traditional IRA?

You can open and make contributions to a traditional IRA if:

  • You (or, if you file a joint return, your spouse) received taxable compensation during the year, and

  • You were not age 70½ by the end of the year.


You can have a traditional IRA whether or not you are covered by any other retirement plan. However, you may not be able to deduct all of your contributions if you or your spouse is covered by an employer retirement plan. See How Much Can You Deduct? , later.

Both spouses have compensation. If both you and your spouse have compensation and are under age 70½, each of you can open an IRA. You cannot both participate in the same IRA. If you file a joint return, only one of you needs to have compensation.


What Is Compensation?

Generally, compensation is what you earn from working. For a summary of what compensation does and does not include, see Table 1-1. Compensation includes all of the items discussed next (even if you have more than one type).

Wages, salaries, etc. Wages, salaries, tips, professional fees, bonuses, and other amounts you receive for providing personal services are compensation. The IRS treats as compensation any amount properly shown in box 1 (Wages, tips, other compensation) of Form W-2, Wage and Tax Statement, provided that amount is reduced by any amount properly shown in box 11 (Nonqualified plans). Scholarship and fellowship payments are compensation for IRA purposes only if shown in box 1 of Form W-2.


Commissions. An amount you receive that is a percentage of profits or sales price is compensation.


Self-employment income. If you are self-employed (a sole proprietor or a partner), compensation is the net earnings from your trade or business (provided your personal services are a material income-producing factor) reduced by the total of:
  • The deduction for contributions made on your behalf to retirement plans, and

  • The deduction allowed for the deductible part of your self-employment taxes.


Compensation includes earnings from self-employment even if they are not subject to self-employment tax because of your religious beliefs.


Self-employment loss. If you have a net loss from self-employment, do not subtract the loss from your salaries or wages when figuring your total compensation.


Alimony and separate maintenance. For IRA purposes, compensation includes any taxable alimony and separate maintenance payments you receive under a decree of divorce or separate maintenance.


Nontaxable combat pay. If you were a member of the U.S. Armed Forces, compensation includes any nontaxable combat pay you received. This amount should be reported in box 12 of your 2016 Form W-2 with code Q.

Sources: https://www.irs.gov/retirement-plans/traditional-and-roth-iras
https://www.irs.gov/publications/p590a/ch01.html#en_US_2016_publink1000230352


Disclosure: I am a certified financial planner.
 

parktrack

"Hoov!" "Target In Sight"
Great post Christcorp. This one needs to be bumped a few times a year. I only wish I would have had this type of advice when I was in my early 20's. I haven't done too bad but could certainly could have done better.

Future and current cadets as well as young officers please heed the advice shared in this thread!

Your financial concepts sound like you've possibly learned from a well-known financial advisor who promotes "endorsed local providers". ;)
 

Christcorp

10-Year Member
AROTC Dad, you are correct. But assuming that the individual has a job, and you don't contribute MORE than you make; or more than the allotted amount to an IRA; e.g. $5,500; then it doesn't matter where the money came from. In other words, the IRS doesn't know if you are using money earned or gifted.

But you are correct. You have to have a job. But for an example, lets say:
1. You work part time while in college throughout the year. Maybe a summer job. You make $5,000 the entire year as taxable income.
2. You also received $1,000 that year for birthday money, christmas money, graduation money, etc.
3. You spent all of your $5,000 earnings, but still have the $1,000 gift money. You could put the $1,000 into an IRA. The IRS wouldn't know WHICH POT the $1,000 came from.

I should have been more clear. But AROTC Dad is quite correct. If you don't have any TAXABLE INCOME for the year, then you can't put money into an IRA.

That's not to say you can't put it into a regular mutual fund. But you will need to monitor it for distributions, dividends, interest, etc. for tax purposes. But academy cadets make taxable income, and I would assume that most college students; whether ROTC or civilian, would have some taxable job income each year. Just make sure you don't put in more than you make, or more than the allotted $5,500 per year for an IRA. As long as you MADE more taxable than you contributed, where the actual money came from, doesn't matter.
 

Christcorp

10-Year Member
And AROTC dad does bring up another good point. For instance. I have a 457b plan at work. (Similar to a 401K). Being I am contributing to it; I CANNOT contribute to a traditional IRA and recognize the tax benefit. HOWEVER, I CAN contribute to a ROTH IRA. There are a lot of rules.

But for the average person on this forum (Cadet/Military member), you have the TSP at work. You can max this up to $18,000 if you want to. That is the best option you have. There are generally some good choices in there. You can do traditional and ROTH style investment choices. You can also do roth and traditional IRA's. I recommend ROTH IRA. I only recommend a traditional IRA if you don't have a Work plan like TSP, 401k, 457b, etc.

Trivia Factoid: For those who didn't know; the numbers 401k, 403b, 457b, and such are the actual code/section of the IRS code for different retirement funds. In other words, if you go to
26 U.S. Code § 401
And get to section "K", you would read about that retirement plans.
 

ProudDad17

Member
Thank you for the responses @Christcorp and @AROTC-dad. That was my understanding of the rule for the Roth IRA, that you had to have taxable income, so gift money or non-taxable ROTC stipend would not count, but I didn't think about money he will earn from a job this summer and in the future I assume his pay from summer training will be taxable. I think he is looking more towards investing it in a mutual fund or similar for the experience picking investments. We talked about the benefits/risks of mutual funds and picking individual stocks. In one of his HS classes they picked stocks to track as part of an assignment, so that sparked an interest with him. I agree getting through college debt free is the primary goal. That will be attainable with his NROTC scholarship, what we have saved in his 529 plan and what DW and I can contribute. DW and I have 457b and 403b plans, in addition to defined benefit retirement plans through our employers, so I am more familiar with those than IRAs. I also agree, you are probably right that, at this point, it would be better to look at saving in something other than an IRA, due to the restrictions on when you can take the money out.
 

AROTC-dad

Moderator
5-Year Member
A simple after-tax brokerage account can be opened online with one of the many fund and brokerage companies. USAA, Vanguard and Fidelity to name just a few. This would allow for a periodic investment program where your DS can gain experience with mutual funds and ETF's (lower cost).

No need to use an advisor, but if guidance is needed, there are numerous "robo-advisors" out there nowadays to assist.
 

Christcorp

10-Year Member
Unfortunately, most of the "Retirement Calculators" aren't very accurate either. Some don't consider spouse's income; Some don't look at pensions; Some don't include Social Security; Many don't consider your cost of living SHOULD be much lower if you no longer have a mortgage, kids, and other debt; MANY of them require a lot more than you really need.

There's a lot of basic math ways to determine what you will need. The simplest that I use is to figure on needing per year what you make currently. E.g. $60,000 - $70,000. Don't worry about inflation, because that will be Off-Set by elimination of expenditures. Meaning, you SHOULD no longer have a mortgage; once in retirement, you shouldn't need to be putting any more money away for retirement, etc. So it will work out for itself.

Then, figure in what you should be getting for any pensions at work and social security for both you and your spouse. Then, whatever you are SHORT, is what you'll want from your retirement fund. 401k, tsp, 457b, IRA, or whatever you have. Either look at living off the interest or gradually taking from it until you die. Then you can determine if you have enough to "Live Rich - and - Die Poor"; or live comfortably and leave something to your kids/family.

Even though I started late, when I take out the money I put away each month for retirement "Which I will no longer need to do once retired" and having no debt such as a mortgage or kid expenses; I figured I will make from 2 pensions and both my and my wife's social security, the same amount of money I'm making per year now. That's without even touching my 401k/457b/IRA's.

There's lots of ways to figure it out. But raimius is correct. MOST PEOPLE have no idea how much they will need. That's why it's great if you can start off at 22-25 years old and invest for 40 years. If you have $1.5 million saved, (Which is EASY TO DO) by the time you retire, you can easily put that into a safe fund that won't lose money. It will make around 4%. You'll be able to take that 4% each year; around $60,000; add that to any pension from your employer and social security, and probably live quite nicely without any debt. Even if you take out 8% ($120,000 a year) and it's replenishing $40,000 from interest +/-, you'll be able to make it last 25-30 years. That will take you to 90-95 years old. It's really not that difficult.
 

Badfinger

Member
I'm a huge fan of saving early and continuously until retirement. One point of order, though, is that dividends and capital gains distributions are taxed, even if they are reinvested back into the same mutual fund. Unless of course, it is invested in an IRA or Roth IRA.
This is why I like the Berkshire Hathaway stock (BRK.B) instead of a mutual fund. It is a stock that is really a mutual fund consisting of approximately 80 companies. It is actively managed but it does not charge an annual fee like a MF and does not pay dividend, so tax efficient if held in a taxable account. And stocks are very cheap to buy today($4.95 per trade).
 

AROTC-dad

Moderator
5-Year Member
Agree with Badfinger that BRK.B is a good stock with active management and tax efficient, but keep in mind that as a single holding, 80 companies is NOT considered a diversified portfolio in accordance with modern portfolio theory.

There are schools of thought for and against active management (as opposed to indexing) as well. It depends on the individual and their situation.

Tax efficiency matters most when your income is high. Most 2LT's are not yet concerned about their tax bracket. :rolleyes:
 

Christcorp

10-Year Member
And remember too, that B&H, while a diversified company, is still a company. They own a lot of assets, but that doesn't make THEM a diversified INVESTMENT.

There are many ways to look at investing. You can look at "Sectors" such as technology, energy, healthcare, retail, etc. You can invest in the sector and make money even with competing companies. E.g. owning BOTH Coke and Pepsi; or Ford and GM. On the other hand, some people invest in a Sector and try to play BOTH sides of a technology. This will reduce your risk, but also your profit potential. E.g. Investing in both fossil fuels and green energy at the same time. That's like playing Roulette and putting $10 on Red and $10 on Black. You can play indefinitely, but you're not going to gain anything.

That's where actively managed mutual funds make their mark. They are diverse enough where winners out pace losers and you'll profit. But they also watch those losers and sell/buy based on the market and forecasts. Hopefully with the result of INCREASING the winners and reducing the losers. But if not, there will still be more winners than losers. Matter of fact; if held for 10 years or more, NO MUTUAL FUND has ever lost money.

Buying individual stocks; or even in a company that has multiple holdings; has a greater potential for loss. Yes, it also has a greater potential for gain, but you have to be very active with your management. And if you buy something like BRK and don't touch it often, the costs are indeed low. But if you trade it a lot, those costs will surpass the fees on a mutual fund. Especially considering that most mutual funds also deal in holdings that pay dividends and such.

So, i know that Badfinger has mentioned a number of times that he prefers investing in individual stocks over a mutual fund. All I'm saying is you can't make a blanket statement that one is better than another. For instance, in the last 5 years, BRK had returns of:

2012 2013 2014 2015 2016 YTD
BRK.B
17.56 32.17 26.64 (-12.06) 23.43 1.41

The Vanguard S&P500 fund as well as similar, had similar returns. The highs may not have when exactly as high, but the low (2015) wasn't nearly as low as BRK. (1.25% vs -12.06).

Bottom line: Mutual funds, won't experience the volatility of the market like stocks will. Including a company with numerous holdings. But in return for some higher safety, there will be some less profits.

And don't get me wrong. I invest in a very large variety of things. Some things I don't even call investments. Such as Silver and Gold. I only have physical silver and gold. And while it doesn't pay dividends, it preserves wealth extremely well. E.g. in 1964 the median average house cost approximately $19,000 or the equivalent in Silver of 15,000 ounces. Let's say 2 people; one had $19,000 in cash and the other had 15,000 ounces of silver, and BOTH were going to go buy a new house. They get in a car accident and are in a coma for 50 years. They wake up OK and said.... "What was I doing?" Oh yea, I was on my way to buy a house. Could the guy with $19,000 in cash buy a house today? No way. But the guy with the 15,000 ounces of silver could, because today, it's the same as $266,000.

The point is; everything is relative. You need to be truly diversified in your HOLDINGS. (Holdings include investments, real estate, cash, belongings, etc. ) FWIW: I consider silver and gold CASH. It's just a DIFFERENT CURRENCY. No different than the dollar, yen, euro, etc. Except, it's been around as a currency for about 6,000 YEARS. Anyway; even your investments need to be diversified. It's up to the individual to determine their balance and risk level. You CAN BE OVER DIVERSIFIED. Back to betting BOTH RED and BLACK on a Roulette table. Or no risk and having ALL CASH in your home safe. No interest and it loses value every year because of inflation.

My suggestion for the new officers: Look at my original post in this thread. I list the 4 types of savings you need.
#1 should be CASH. I recommend half dollars and half silver
#2 is your checking/savings account to pay all your bills and spending money
#3 should be in money markets, CD's, savings bonds, silver/gold, etc. Money you don't need tomorrow, but you don't want to tie up for 30-40 years like an IRA.
#4 Should be diversified around TSP/401K/IRA/529/etc. Diversified with mainly equities; both mutual funds and stock funds; some bond funds; etc.

You will find, that as time goes on and you have less expenditures and some of these 4 savings group outgrow themselves, you can move stuff around. E.g. #1 is an emergency fund. 3-6 months of income. But if your house is paid off and you don't have a lot of expenses, you may only need 2-3 months of emergency funds. You can move some into #3. Or, if you're taking in a lot more than you're spending, and #2 (Bank account) is getting too big, you can increase the amount going into #4. If you realize what EACH of those 4 savings are for, and realize how flexible or firm each can be, then it becomes very easy to diversify around those.
 
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