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Maximize Retirement Investing:

Be Financially Healthy for Life

I have a friend in his forties who has a bodybuilder physique. But he is not some wild health nut. He watches what he eats and works out a couple of times a week. I have another friend in his thirties who diets fanatically, runs every day, lifts weights three times a week, but is still forty pounds overweight. The second guy started his health journey a couple of years ago and is losing weight and getting in shape. The first muscleman maintains what he worked hard years ago to get, but he isn’t working nearly as hard today.

The Total Money Makeover is the same way. Gazelle intensity is required to get to the wealth steps, but simple maintenance will keep your money muscles maintained. Keep in mind that my muscleman friend never eats three plates of food at a sitting. He is still aware he can lose his fitness, but he can look good and feel good with a lot less effort, assuming he remembers the principles that got him his great body in the first place.

Gazelle intensity has allowed you to lose one hundred pounds of debt and get your cardio emergency fund ready. That foundation will allow you to become financially fit by toning your muscles. You have attacked your debt; it is gone. With the extra money after eliminating your debt, you attacked your emergency fund; it is funded. You are now at a crucial time. What do you do with the extra money that you poured into the emergency fund and debt payoffs? This is not the time to give yourself a raise! It is time to invest.

Investing for retirement in the context of a Total Money Makeover doesn’t necessarily mean investing to quit your job. If you hate your career path, change it. You should do something with your life that lights your fire and lets you use your gifts. Retirement in America has come to mean “save enough money so I can quit the job I hate.” That is a bad life plan.

Harold Fisher was one hundred years old. He worked five days a week at the architectural firm he founded. Mr. Fisher doesn’t work because he needs money, he worked because he finds joy in what he does. He is a designer of churches. His favorite saying was, “People who retire early, die early.” Harold Fisher is financially secure and able to do what he wants, and that defines retirement The Total Money Makeover way.

When I speak of retirement, I think of security. Security means choices. (That’s why I think retirement means that work is an option.) You can choose to write a book, to design churches, or to spend time with your grandkids. You need to reach the point where your money works harder than you do. A Total Money Makeover retirement plan means investing with the goal of security. You already possess the ability to quit your job, and if you don’t like your work, you should consider doing that. If not today, develop a five-year game plan for transitioning into what God designed you to do; however, don’t wait till you’re sixty-five to do what you love.

That said, the money part does matter. You want to reach your golden years with financial dignity. That will happen only with a plan. USA Today, reported recently that 56 percent of Americans do not systematically prepared for retirement age by investing. Consumer Federation of America found that of people making less than $35,000 per year, 40 percent said the best way for them to have $500,000 at retirement age is to win the Lotto. Wealth Builder magazine’s poll found 80 percent of Americans believe their standard of living will go up at retirement. Talk about living in a fantasy!

The reality is much colder. USA Today reports that out of one hundred people age sixty-five, ninety-seven of them can’t write a check for $600, fifty-four are still working, and three are financially secure. Bankruptcies among those sixty-five and older went up 244 percent in a ten-year period. Getting older is going to happen! You must invest now if you want to spend your golden years in dignity. Investing with the long-term goal of security is not a theory to ponder every few years; it is a necessity you must act on now.

Baby Step Four: Invest 15 Percent of Your Income in Retirement

Those of you concerned about retirement are relieved we have finally gotten to this step. Those who have been living in denial are wondering what all the fuss is about. Baby Step Four is time to get really serious about your wealth building. Remember, when you reach this step you don’t have any payments but a house payment. With only one payment, it should be easy to invest heavily. Before this step, you have ceased or have never started investing, and now you have to really pour on the coals.

Gazelle intensity in the previous steps has allowed you to be able to focus on growing a sizable nest egg. The tens of thousands of people we have met have helped me develop the 15 percent rule. The rule is simple: Invest 15 percent of before-tax gross income annually toward retirement. Why not more? You need some of your income left to do the next two steps, college saving and paying off your home early. Why not less? Some people want to invest less or none so they can get a child through school or pay off the home super-fast. I don’t recommend that because those kids’ college degrees won’t feed you at retirement. I don’t recommend paying off the house first because I have counseled too many seventy-five-year-olds with a paid-for house and no money. They end up selling the family home or mortgaging it to eat. You need some retirement investing at this stage before saving for college and the mortgage payoff. Plus, by getting started now, the magic of compound interest will work for you.

When calculating your 15 percent, don’t include company matches in your plan. Invest 15 percent of your gross income. If your company matches some or part of your contribution, you can consider it gravy.

By the same token, do not use your potential Social Security benefits in your calculations. I don’t count on an inept government for my dignity at retirement, and you shouldn’t either. I’m not taking a political position, but the mathematics of that system spell doom. If Social Security isn’t there when you retire, you’ll be glad you listened to my advice. If by some miracle Social Security is there when you retire, that will mean I was wrong. In that case, you’ll have some extra money to give away. I’m sure you’ll forgive me for that.

Now that you have reached this step, you need to learn about mutual funds. The stock market has averaged just below a 12 percent return on investment throughout its history. Growth-stock mutual funds are what I recommend investing in for the long term. Growth-stock mutual funds are lousy short-term investments because they go up and down in value, but they are excellent long-term investments when leaving the money longer than five years. My personal retirement funds and my kids’ college funds are invested the way I teach in the The Total Money Makeover.

Here’s a Reader’s Digest version of my approach. I select mutual funds that have had a good track record of winning for more than five years, preferably for more than ten years. I don’t look at their one-year or three-year track records because I think long-term. I spread my retirement, investing evenly across four types of funds. Growth and Income funds get 25 percent of my investment. (They are sometimes called Large Cap or Blue Chip funds.) Growth funds get 25 percent of my investment. (They are sometimes called Mid Cap or Equity funds; an S&P Index fund would also qualify.) International funds get 25 percent of my investment. (They are sometimes called Foreign or Overseas funds.) Aggressive Growth funds get the last 25 percent of my investment. (They are sometimes called Small Cap or Emerging Market funds.) For a full discussion of what mutual funds are and why I use this mix, go to daveramsey.com and visit MyTotalMoneyMakeover.com.

The invested 15 percent of your income should take advantage of all the matching and tax advantages available to you. Always start where you have a match. When your company will give you free money, take it. If your 401k matches the first 3 percent, the 3 percent you put in will be the first 3 percent of your 15 percent invested. If you don’t have a match, or after you have invested through the match, you should next fund Roth IRAs.

There are some limitations as to income and situation, but most people can invest in a Roth IRA. The Roth grows tax-FREE. If you invest $3,000 per year from age thirty-five to age sixty-five, and your mutual funds average 12 percent, you will have $873,000 tax-FREE at age sixty-five. You have invested only $90,000 (30 years x 3,000); the rest is growth, and you pay no taxes. The Roth IRA is a very important tool in virtually anyone’s Total Money Makeover.

How much do you need to retire with dignity and security? How long will it take you to get there? You are secure and will leave a nice inheritance when you can live off of 8 percent of your nest egg per year. If you make 12 percent on your money average and inflation steals 4 percent, 8 percent is a dream number. If you make 12 percent and only pull out 8 percent, you grow your nest egg by 4 percent per year. That 4 percent keeps your nest egg, and therefore your income, ahead of inflation ‘til death do you part. If you can live with dignity on $40,000, you need a nest egg of only $500,000. I would recommend that you have the largest nest egg possible because there are some really cool non-greedy things to do with it later, like giving it away.

If, when you run the calculations on the worksheet, you are afraid you won’t make your goal of saving 15 percent, keep in mind that this is just Baby Step Four. Later steps will allow you to accelerate your investing while still having a life.

Would you dream with me for a moment? Dream that a twenty-seven-year-old couple with average to below-average income commit to a Total Money Makeover. They get gazelle-intense, and in three years, by age thirty, they are at Step Four. They invest 15 percent of their income. The average household income in America is $50,233 per year, according to the Census Bureau. Joe and Suzy Average would invest $7,500 (15 percent) per year or $625 per month. If you make $50,000 per year and have no payments except the house mortgage and live on a budget, can you invest $625 per month? Follow me here. If Joe and Suzy invest $625 per month with no match into Roth IRAs from age thirty to age seventy, they will have $7,588,545 tax-FREE! That is almost $8 million. What if I’m half wrong? What if you end up with only $4 million? What if I’m six times wrong? Sure beats the 97 out of 100 sixty-five-year-olds who can’t write a check for $600!

I would submit to you that Joe and Suzy are well below average. Why? In our example they started at the average household income in America, and in forty years of work never got a raise. They saved 15 percent of income and never increased it by one dollar. There is no excuse to retire without financial dignity in the United States today. Most of you will have well over $2 million pass through your hands in your working lifetime, so do something about catching some of that money.

Gayle asked me one day if it was too late for her to start saving. Gayle wasn’t twenty-seven like Joe and Suzy. She was fifty-seven years old. Life had dealt her some blows and had knocked most of the hope out of her. A Total Money Makeover is not a magic show. You start where you are, and you do the steps. These steps work if you are twenty-seven or fifty-seven, and they don’t change. Would it have been better for Gayle to start when she was twenty-seven or even forty-seven? Obviously. But once she’s done with the pity party, she still needs to start with Baby Step One and follow The Total Money Makeover step-by-step to put herself in the best position possible.

It is never too late to start. The past has passed. Start where you are, because that is your only option.

Baby Step Four is not “Get rich quick.” The investing you do systematically and consistently over time will make you wealthy.

I think I see a smile broadening. I know when Sharon and I reached this step, things started to move in our lives. We started to regain the confidence that losing everything had taken from us. You are going to win. Can you feel it? Can you see it? Your life is changing! This is fun! Now, let’s take another step.