Saving For Your Future
Monday, April 1st
Last week the second most famous New England Patriot football player announced his retirement. At age 30, Ron Gronkowski is taking off the helmet and pads for good. According to Spotrac, Gronkowski has his entire NFL career earnings, a tidy $54M, to retire on.
Gronkowski has famously saved all his earnings, spending only the money he has earned through endorsements and has previously advised other players to watch their spending habits as well. “Get what you need to be comfortable, save the extra. It’s a short career here in the league. The average is about three to four years, and when it’s done, it’s done. Be simple, manage it safe, so when it’s done you’ve got a little base, a little foundation to live off.”
No matter what your income level, frugality is a trait that leads to wealth. When we spend above our means or spend instead of saving for retirement, we become slaves to earning a paycheck. Even with a stellar income, the way you spend that money is what determines your level of wealth.
Jay Leno had a similar strategy to Gronkowski’s. He said that he always tried to have two jobs—one from which he spent money and one from which he saved all his money. Leno saved all his “Tonight Show” hosting money, $30M per year, and spent only what he earned doing stand up comedy gigs.
Perhaps you think that these stories hardly apply to you, but the truth is, the faster you can accumulate and save money, the less tied you will be to needing a consistent paycheck. This is what preparing for retirement is all about.
With that end in mind, here are a number of important saving strategies that can help ensure that you reach your retirement goals:
Adjust Your Money Mindset – A lot of people say they love money, but then they get rid of it as soon as possible by spending it. Consider adjusting your money mindset to recognize that if you truly love money, you will want to keep it more than you will want more stuff.
Think about the things you really need now and then things you will need in the future, before you start thinking about your wants. Remember that it’s not how much you make, it’s how much you keep.
Pay Yourself First – Hopefully this is a deeply ingrained habit in your life. Always save and pay yourself before you meet any other obligations. You can set up your paycheck to make automatic payments to make this process even easier.
Find Low Cost Funds – When you invest your savings, the expense ratio and other investment fees reduce the returns you earn on those investments. Investing in lower cost funds can help improve your portfolio’s performance in a couple of key ways. Not only do lower fees result in more money overall to invest and grow, remarkably, multiple studies by Morningstar and other organizations have shown that funds with smaller fees actually perform better in the market as well.
Do a careful evaluation of every investment you have to make sure that your fees are not eating up too much of your investment, and always make sure the cost-benefit ratio is working in your favor.
Save More as Your Salary Increases – When you receive a salary increase or a bonus, dedicate at least half of it to retirement before you get used to having the extra money in your budget. As you get older, you may want to save all of these increases.
This is similar to the idea of having two jobs and spending from one while saving from the other. While you may still only have one job, all the increases and bonuses could go automatically into savings, providing a small “second” savings income.
Contribute for as Long as Possible – Retirement investing is a wise habit that you should continue for as long as possible. There is no age limit for contributing to an employer-sponsored retirement plan, nor for a Roth IRA. (Traditional IRAs can only be funded until the year before you turn 70½.)
The same principle should be followed when it comes to taking your Social Security. Delay taking your social security check for as long as possible. If you can wait until you are 70, there are significant income increases in these payments.
Avoid Early Withdrawals – Removing money early (before age 59½) from an IRA account or other retirement savings account is not usually a good idea for a couple of reasons. First, of course, is that you will have to pay taxes on the money and most likely also pay an early withdrawal penalty.
Not only that, but you put your retirement in jeopardy because you may not be able to replace these funds before retirement and even if you do, you will miss out on years of growth.
Tackle Your Tax Bill – If you pay less in taxes, you will have more money. I realize that this is not rocket science, but too many people simply pay taxes without doing it in a tax-efficient, strategic way.
For example, if you “tax diversify” with a combination of tax-free and tax-deferred accounts, then you can have flexibility in the way you take your withdrawals so that you can strategically withdraw amounts that give you the most favorable tax bill. Rather than take a withdrawal from a tax-deferred account that may push you into a higher income bracket, you can take some of those withdrawals from a tax-free account instead.
Evaluate Your Risk – While saving is critically important to preparing for retirement, keeping what you save is even more important. Carefully monitor the amount of risk you are taking with your investments, particularly as you approach retirement. Where it is appropriate, take measures to reduce your risk and concentrate on preservation rather than growth. Investments with less risk like annuities and bonds may have a place in your portfolio, depending on your personal situation.
Talk to your financial advisor about the actual risk in your portfolio and make sure you have mechanisms in place to automatically protect you against large-scale losses.
Though most have us have not been able to save $54 million dollars over the last nine years, there are still valuable lessons to be learned from the way Rob Gronkowski and other wealthy people have prioritized saving.
No matter where you are in your preparation for retirement, I hope that these savings strategies will help you keep more of your hard-earned money. At Acute Wealth Advisors we know you love your money and we are here to help you take care of it so that it is there for you in retirement. We can help you evaluate your fees, your risk, your tax diversification, your savings rate, and your entire retirement plan so that when the day comes for you to hang up your own helmet, you will be ready.
Contact us today and we’ll help you keep more of your money so it’s there when you need it!