Put Retirement First

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Jonathan Clements was a longtime personal finance columnist for The Wall Street Journal, and he offers great advice at the best price you can get (free) on his blog Humble Dollar. Here is one piece of advice from his site:

PUT RETIREMENT FIRST. Are you socking away at least 12% of your pretax income toward retirement, including any matching contribution to your employer’s retirement plan? To amass enough for retirement, you may need to throttle back other financial ambitions, including the size of the house you buy and how much you help your kids with college costs.”

This advice is about two things, savings rate and priorities. First, let’s tackle savings rate.

One of the seminal moments in my financial life occurred when I read the book The Automatic Millionaire by David Bach. In that book was a table that said something like this:

  • If you want to be poor and work your entire life, save < 10 percent of your gross or pre-tax income.
  • If you want to be normal and retire at a traditional age, save 10-20 percent of your gross or pre-tax income.
  • If you want to be rich and retire early, save 20 percent or more of your gross or pre-tax income.

You can probably guess how my story ended…I saved 20 percent. Then I increased by 1 percent every 1-3 months until I hit 30 percent, which has been my savings rate ever since. This is probably the #1 reason I am financially independent. The #2 reason is the value of my military pension.

As Mr. Clements discusses, when you put retirement first it isn’t just about your savings rate, though. It is also about priorities.

You can’t borrow money to retire, therefore you need to max out your retirement savings before you start saving money for your kids’ education.

You need to max out your retirement savings before you buy a house that is larger than you really need.

You need to max out your retirement savings before you pay for private school.

You need to max out your retirement savings before you purchase a new car or a used luxury car.

It’s your life and it’s your retirement. Get your priorities straight and make retirement your #1 financial priority.

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