Three Questions to Assure Financial Freedom

With the Class of 2017, graduates are close to leaving for the workforce with newly minted bachelor degrees.  These are exciting times. 

But these new-hire have two life changing responsibilities before them: 

#1 getting and nailing their first job assignment, and  

#2 setting a solid foundation for their eventual financial independence 

No one will watch over your financial future than you.  Here are some critical steps to securing a paths to truly golden years 

Ending your career with freedom, is intentional: 

 

  • What is your 401k Initial-Percentage?  You need to set a pre-determined number for percentage of your compensation that will divert from your paycheck straight into your 401k (or other instrument offered to you).  I am suggesting that this number be set prior to you making decisions on two other key factors:  Transportation and Housing.  Too often people do this backwards and claim, ‘I did not have enough money to start investing for my future,’ and lose the huge advantage of compound interest in their 20’s.  If your employer offers a ‘match’ (matching say 100% of the first 6% you put into your 401k you MUST start there.  If there is not match, begin with a minimum of 3% and more if you can. 
  • What is your 401k Goal-Percentage?  You need to set a goal percentage that you will eventually divert to your 401k.  The most noted financial experts in the country suggest you invest 12-15% of your compensation.  So be bold with your initial strategy and set your number, let’s call it 15% for this example.  Too often people sign-up for their 401k with a flurry of new-hire documents with little thought and no strategy (big mistake) and put a small percentage down.  Years later they look at their balance and wish they had been bolder.  Have a predetermined goal for your eventual percentage is very smart. 
  • Are you willing to hold your lifestyle flat until you reach your goal percentage?  NOW FOR THE POWER OF THIS STRATEGY.  Are you willing to apply ALL of your annual pay raises at the early moments of your career to accelerate getting to your ‘goal percentage?’  After that, 15% of every raise goes to your 401k and 85% goes to enhancing your lifestyle. 

 

The Big Payoff: 

I am picking a state school from the salary report at PayScale.com that will project average early career salary, and mid-career salary (age 42) as an example I am using Ohio University in Athens Ohio. 

 

  • Early career salary:  $43,600 
  • Mid career salary:  $77,000 

 

 The Math: 

 

  • You begin with your Initial-Percentage of 6% into your 401k (your employer does not match) 
  • You set your ‘Goal-Percentage’ at 15% (your contribution and your employers combined) 
  • The 401k is in equities yield (on average) a conservative 7.5% return 
  • If you apply 100% of your 2.88% annual raise (straight math from the PayScale numbers) you will be at your 15% goal in 4 years 

 

At 65? 

 

  • You have just over $2.9 million dollars in your account 
  • If ratchet down the risk of your portfolio to a 5% annual return during your golden years (less volatility) 
  • And you withdraw 4.5% annually 
  • At retirement you are making more money (nearly 20%) than your last year of working 

 

Now that’s worth a bit of strategy and early sacrifice to be assured all will be well and your golden years will truly be golden.

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