MyRA Won’t Help The Retirement Savings Crisis

Flip flops in the sand during retirementSo you listened to the State Of The Union and heard President Obama muff the pronunciation of MyRA. Was that “My IRA?” Or was that “Myra,” like a woman’s name? I’m going with the latter.

There’s an excellent 2,100 word piece entitled, “Will MyRA Solve The Retirement Crisis?“ on Daily Capital you may want to check out. In the post you’ll find several shocking statistics about retirement:

  • 48%, or 44.5 million workers,  worked for employers who did not offer a retirement plan as of 2011 (NIRS).
  • Approximately 45% of households, or 38 million households, have no retirement account assets (401k or otherwise).
  • The median value of retirement account balances is $3,000 for all working-age households and slightly higher ($12,000) for those near retirement age.
  • Less than 1 out of 10 eligible working age individuals voluntarily contribute to an IRA.

Even if these statistics are half true, we’ve got a big retirement problem on our hands! Social Security is not going to be nearly enough, especially since it’s underfunded in its current state.  (See: How Much Savings Should I Have By Age)

The Ideal Split Between Passive Income And Active Income For A Better Life

A better life, three kids on boogie boardsActive income is much more enjoyable than passive income due to the positive feeling of purpose. We want to know our actions make a difference no matter how small the scale. So for those of you who fear retirement expediting your demise, don’t worry. Every able bodied retiree will naturally gravitate towards doing something useful to keep themselves healthy.

When my total income was dominated by active income I was thrilled but felt there was NO WAY OUT. The only way to flourish was to work hard and constantly stress about being the best to continue getting paid and promoted. I’m already quite disciplined, so to add high expectations from managers only compounded the one more year syndrome. It wasn’t until passive income hit about $3,000 a month in 2008 when I began to see the stars.

$3,000 a month wasn’t enough to live comfortably in my current house in San Francisco, but it felt good knowing I could survive on my own if absolutely necessary. Worst case scenario I’d sell my properties and rent a studio for $1,400 a month. With $700 a month left in disposable income after taxes, I’d wait it out until an opportunity came along.

Progress begets progress. Once I started thinking about the worst case scenario I became hooked on creating better worst case scenarios. I won’t be able to easily send more than one kid to private school in SF if need be, but my current worst case scenario is OK. Besides, I was told there is need-based scholarships for families who make less than $100,000 a year per child so that’s good! Fingers crossed for a studious and smart kid.

I’d like to quantify a framework of happiness between passive income and active income as a percent of total income. The goal is to provide motivational goals for those seeking financial independence. I’ll share with you some of my thoughts along the way so you get a sense of how the journey feels.

The Top 5 Cities In America To Get Rich And Enjoy Life!

Polar Vortex

Polar Vortex Coming For You

Given day job income is the number one source of income for the majority of the population, it behooves us all to go where there’s robust employment. But wouldn’t it be ideal to not only find a lucrative job, but also live in a great environment at the same time?

After reading one too many “best places to live, retire, work” articles that left me scratching my head in disbelief, I decided to create my own list based on the following criteria:

* Experience. There’s no voodoo journalism where the author writes about places he’s never been to. I’ve lived in all of these places for years except for one.

* Wealth. Wealthy people can live anywhere in the world. So it’s logical to follow their money to see where they reside.

* Weather. “Go West young man!” said one of our first settlers. No rational person would choose living in freezing cold weather for half the year when they could live in temperate or warm weather all year around. Polar Vortex be damned!

* Diversity. The world is global. Life is much better when you speak a second language, experience different cultures, and eat all sorts of food. If you only speak one language, have never traveled internationally, and eat chicken every day, this list is not for you.

* Employment. All five cities on my list have unemployment levels below the nation’s unemployment level of ~6.7%. Go where the jobs are.

Suggested Net Worth Growth Targets By Age

US Household Net Worth Chart 2013Methodically growing your overall net worth is what wealth creation is all about. Your net worth is the culmination of savings, investing, real assets, and liabilities. I’m much more concerned about growing my net worth than only growing my stock portfolio because my stock portfolio is just a portion of my net worth.

Think of your net worth like a battleship during a time of war. As the intrepid captain, you are navigating your net worth to glory through sea mines of temptation and unknown icebergs of economic downturns. The greater you build your net worth, the more careful you steer.

It’s always important to think about your net worth in a risk adjusted manner. Putting 100% of your net worth into the stock market isn’t so bad when you’re a single 28 years old with $150,000 to your name. But if you’re 50 years old with a couple kids entering college, you’re likely not allocating your entire $1 million in assets into the stock market.

When I was in my 20s, I didn’t really track my net worth because I didn’t know better. I was focused on my career and saving as much as possible. My idea of net worth diversification was investing as much as I could away from the stock market given my pay and career were already dependent on the stock market. Every year 20%-30% of my compensation was paid in the form of company stock so there was no escape.

For 10 years this strategy worked pretty well because the stock market really didn’t go anywhere from 2000 – 2010 and real estate caught fire until 2007. Now everything is on fire! Let’s just hope the battle ship doesn’t burn down with so much unbridled mania.

I’ve been much more surgical in managing my net worth in my 30s given it has grown to a point where it throws off an important passive income stream. Not having a day job anymore makes it that much more important to protect my financial nut. If I can grow my net worth by 10% per annum, I’m usually satisfied. To put 10% in context, Bernie Madoff was able to amass $50 billion dollars under management because he delivered fake 10% annual returns!

In this article I’d like to provide several net worth growth targets to consider as well as a net worth growth framework by age. I think if I was able to read this article four years ago, I would have allocated more of my net worth into equities and would have a 10% higher net worth as a result. Hopefully this framework will help many of you build wealth.

Top Financial Resolutions For The New Year

New Years ResolutionsHow many of you achieved last year’s resolutions? How many of you still remember what last years resolutions were? If you don’t write down your goals, you’re more than likely to forget.

Here’s a quick recap of my official five resolutions for 2013 written at the end of 2012. Only two are financial related.

1) Live Free. Although leaving Corporate America in 2012 allowed me to travel freely, I decided to take a moderate approach instead due to the unknown risk of no longer having a paycheck.

Result: Pass. 2013 was much more of how I thought a free life would be like compared to 2012 because all the building blocks were already set. The longer you go without an income, the more confident you are you don’t need a job to survive. 12 weeks of travel and setting my own schedule felt great. Now that I’ve experienced absolute freedom for over a year, I’m now considering going to work part-time for a start-up or even full-time if there’s a great fit.

2) Bring The Family Closer. My immediate family all live 5+ hour flights away. I plan to leverage my finances, the internet, and our shared interest for travel to keep our relationships healthy.

Result: Work in progress. I convinced my sister to invite our parents to go visit her during Thanksgiving last year, a win since they live 11 hours by flight away and her apartment doesn’t comfortably accommodate four people. She’s got a busy life and my parents don’t want to intrude. I’m very grateful to have crashed at my sister’s place for 10 days this summer. We had awesome life conversations that haven’t been discussed in over 10 years. Finally, several articles on FS helped open up some candid dialogue between my parents and I, which is always one of my intentions. 

3) Grow Net Worth Faster Than The S&P 500. It’s one thing to have the stock portion of your net worth outperform the S&P 500, it’s another thing to have your total net worth outperform the index. A 9% net worth increase should be feasible if my stocks and real estate equity grow faster than 11% (70% of net worth) to make up for my CDs and risk free assets which will only grow by about 4% (30% of net worth).

Result: Pass, but disappointed with 32% due to greed since everything went up huge in 2013. I understand why busy people appreciate leaving their money up for others to manage. It feels good knowing someone is looking out for your money manners as you go all out on your entrepreneurial goals. This is my main financial resolution I’ve had for 10 years. 

4)  Put My Finances On Autopilot. I’ve been using an Excel spreadsheet with over 50 line items to track all my expenses, assets, and liabilities manually for the past three years. I still enjoy keeping on top of my finances, but I want to spend less time focusing on the nitty gritty since my spending, saving, and investing patterns are pretty set. Instead, I’m leveraging technology to stay on the ball. To care less about your finances, you first have to care a great deal about your finances.

Result: Pass. After deciding on a savings goal, a monthly spending limit, a comfortable net worth allocation, and a travel budget for the year, that was it. I enjoy checking-in on how my boys are doing to make sure they’re behaving, but I don’t have an obsession anymore that takes away time from doing other enjoyable things thanks to technology. 

5) Smile Much More. When I was younger, a friend of mine nicknamed me, “Smiles” because I would always be smiling and not even know it. I’d walk by strangers on the street who would always weirdly smile back. As I entered into the real world of work, bills, graduate school, and financial responsibility, I think my smiles have faded. I’d like to regain this natural disposition and spread some cheer.

Result: Undecided. When I bashed my face that one night from too much partying, I may have thought to myself, there goes my smile due to the huge hole in my lip. But the doctor stitched me up good and supposedly the scar will fade over a year. But this goal really isn’t about physical appearance. It’s about being so happy you’re unaware about positive physical manifestations that occur that brings more joy to those around you. 

If You Can Make It In Hawaii You Can Make It Anywhere

Kahala Resort & Hotel View

There’s an old saying, “If you can make it in New York, you can make it anywhere.” The idea is that with New York City being so competitive, only the strongest survive. I worked on the trading floor at one of the most hardcore investment banks around and I can unequivocally tell you that making it in NYC is brutal. The weather beats you up for at least six months a year, the work hours are long, and your money doesn’t go very far.

Two years and 15 pounds heavier I left NYC in 2001 for an easier life out in San Francisco where I didn’t know a soul. I thoroughly admit I didn’t make it in NYC. Perhaps I could have stayed on as a third year financial analyst, but surely Goldman would have made me go back to business school afterward rather than promote me directly to Associate. The thought of returning to school at the time and spending all that money wasn’t appealing.

By spring 2001 it was clear the economy was not in good shape one year after the NASDAQ collapsed. I decided to take matters into my own hands and jump to a competitor for that Associate promotion and raise instead.

Waiting to get let go is like waiting to die.