My 401K is gonna be pissed!

Screen shot 2009-12-10 at Dec 10, 2009, 11.38.09 PMI made a pretty impulsive move yesterday. I decided to reduce my 401K contributions from 8% of my gross salary to 5%. *Gasp* Yes, that does mean I am going to have less in my retirement accounts, but don’t worry, I have a ninja-riffic plan in the works. If you read my post on Monday, you know I’m flirting with the idea of living outside of my spreadsheet. As a result, my net worth come retirement may be a little lower, but I think my overall quality of life will improve.

There were a few things that lead to my decision to decrease my contributions.

1) I was contributing 8% to my 401K and fully funding my Roth IRA each year. At my current income ($50K) that works out to 18% of my gross income being invested in retirement accounts. If you keep up with PF blogs, news stories, and TV shows, you’ll notice almost all ‘experts’ recommend a 20-something individual save between 10%-15% of his gross income for retirement. I was contributing 3% more than the average recommendation. Obviously, the more you contribute, the richer you will likely be. But I don’t really care if I have $3MM or $4MM in my account come retirement, as long as I have enough to live a comfortable lifestyle I’ll be a happy ninja. Oh, and the government only matches 5% anyways.

2) I essentially just gave myself a 3% raise. I have contributed 8% to my 401K since my first day of work (at the ripe age of 22). I’ve totally learned to manage my money being 8% poorer than I could be. I now will be taking home about $1,200 more per year (after taxes). That’s $1,200 I can use to save for a house, take a vacation, buy a moped, or rent out an entire movie theater for a private viewing of Twilight III. Sure, most of those expenses are not necessary, but don’t forget, I’ll still be socking away 15% for my gray hair days ahead.

3) The third, and probably most important, reason I decided to reduce my retirement contribution by 3% is this: I had no plans for the short term. Sure saving 18% for retirement is great, but guess what? That doesn’t make me rich until I’m 60 years old. What if I want to have a good chunk of change accessible in my 40’s? What if I want to retire early, but don’t want to be penalized for withdrawing from my retirement accounts? Well my friends, this is where the ‘short-term’ investing game comes in to play. I have to start exploring other means to grow my money. I have been so focused on retirement, I completely forgot to establish a game plan for my 30’s, 40’s, and 50’s.

Sure, I am taking away 3% from my retirement accounts each year, but that doesn’t mean I’m going to waste it. Instead I will transfer that money in to an investment vehicle of my choosing (stocks, bonds, etc). I need to start growing money for a 5, 10, and 20 year time horizon so I can do things like pay cash for the next vehicle I purchase, move up in house as my family size grows, pay for my kids college, and basically enjoy pre-retirement life.

As long as I contribute 15% of my gross income towards retirement, I have no need need (or reason) to contribute more. I’ve realized for me, anything above that 15% mark can be better served in short term mutual funds, real estate, cash, and bonds.

If you aren’t sure what percentage of your income you should be setting towards retirement, ask yourself this question. Would you rather have access to $6MM at age 60, or access to $1MM at age 45 and $3MM by age 60. I use to think I wanted $10MM all at retirement, but I now think I’d be just fine with $3MM in retirement if it meant I had $1MM available to me much sooner.

I have a couple questions for you all, how much do you contribute to retirement (if any), how much would you ideally like to contribute to retirement (if you are currently meeting that goal), and would you rather have $6MM at age 60, or $1MM at 45 and $3MM at age 60? What strategies have you established for pre-retirement goals? What short term investment vehicles do you recommend? Do you think I’m crazy? Any helpful hints, tips, and criticism is greatly appreciated 🙂

I refuse to let my house be an investment

So I’m a little weird and have a slight obsession with HGTV. I’m not particularly fond of the decorating shows, but when it comes to shows on the home buying process I’m pretty much an addict. I was watching “My house is worth what?” last night when I had an epiphany: I don’t want my house to be an investment.

This show focuses on individuals that are having their homes appraised. One of the couples in yesterday’s episode said they wanted their house appraised because they had not saved for retirement properly and they were hoping the equity would provide some funding for their later years. Those people are freakin’ crazy!

I know a lot of people are eager to purchase homes because they consider them a “good investment”. I wont argue with them, but I don’t ever plan to classify my residence as an investment. Instead, my home will be a forced savings account.

Once I get to experience the joys of home ownership, I never intend to return to renting. What does this mean? I don’t consider home ownership an investment because I am always going to need a place to live. Although it’s true that I will probably build equity in my home over the years, I am reminded there is a difference between paper gains and realized gains. I feel like I’m probably confusing the crap out of you so let me see if this example helps.

Let’s pretend I buy a house this year for $200K. Assuming a 5% home appreciation over 10 years my house will be worth $325K in 2019. Pretty sick that I made $125K without having to do anything. But let’s not forget our enemy inflation. Taking 3% inflation in to account it is more like a $57K gain over the ten years, still pretty sweet. But guess what. Ten years from now I’m still going to need a place to live. The $57K is just a paper gain, meaning it is intangible money (unless I took out a HELOC, which I will NEVER do!). The only way to actually have access to that $57K would be to sell my house. If I sold my house where am I going to live…in another house?

I guess in theory one could argue that you could downgrade in home as you get older to pocket the appreciation, but why the heck would I want to downgrade in life? As I get older I plan to UPGRADE. I know that home ownership can be a pretty sweet gig in the long term and it probably is an “investment”, but I am much more comfortable thinking of my home as a forced savings account so that I can eventually buy a bigger and better house. It made me really sad to see this couple on HGTV put all of their retirement hopes in the equity in their home. They are crazy and I don’t like it.

Sometimes the best investments return no money

Can ya guess where this article is going? It’s time to get all sentimental up in hurr and take a step away from money… kind of. If you’re like me, it’s probably not uncommon for you to make everything become a monumental financial decision. I have been trying to balance my priorities and make sure my journey to being freaking rich doesn’t prevent me from having fun and making “investments” in other areas of my life.

As much as we value money, I’m sure we all value friends, family, fun, happiness, beer?, sleep, laughter more. As a means of accountability (to myself) I am going to lay out the various parts of my life that I want to continually be investing in.

The girlfriend (aka The Girf): Let’s face it, dating is expensive. I don’t reap the benefits of combined housing, joint checking accounts, dual income like I will when there is a ring around my finger. As the boyfriend, I personally believe I should pay for virtually all meals. That’s not because I feel obligated too, but because I want to. But as we all know, dining out can get expensive real quick. I have actually caught myself avoiding dates with my girlfriend to spare a couple bucks…dumb. There is nothing wrong with paying a little extra for an “investment” in our relationship. The date isn’t just about the food we shove in our face, but about the quality time we get together, trying something new, and getting away from distractions. I’d way rather pay $20 for a meal with my Girf than $20 to go a movie theatre and not get to talk to her. I will temper my uber frugal nature with a little bit of love and common sense.

Family/Friends: I live in San Deezy. The majority of my family and friends live in Seattle. A round trip ticket usually costs around $250. It’s been a while since I have gone home just to go home. That’s not to say that I haven’t been lately (was there in January, March and April), but each trip had a specific purpose. January was Xmas time and March and April were both for weddings. It’s been a while since I have just taken a vacation for the sole purpose of enjoying the company of my parents, siblings, and friends. I think about heading up there every summer for a week long get away, but haven’t done it since college. Even if I can’t make it back to the Pacific Northwest I can sure try and call/email/tweet/facebook/instant message/text my friends and family more often.

Food: Eating healthy is easier said than done for me. I just can’t get over how expensive it is to eat organic, non preserved, no sugar, etc. I have cruised to the grocery store and made it a mission to buy healthier choices. Needless to say, the bill is noticeably higher. I use to be frustrated with a larger grocery bill, but then I thought to myself “Is more expensive ALWAYS a bad thing?” I enjoy life and want to extend my time on earth as long as possible. Eating twinkies, Jack in the Box, and ice cream wont help accomplish that goal. Over the last year I have drastically changed my eating habits and I try to cook (from scratch) the majority of my meals. Although, I still don’t buy strictly “organic” I have definitely improved the sexiness of my grocery cart.

Fitness: I think we all know that running, yoga, weights, sit-ups, and just about any other type of physical activity is good for us, but few actually do anything about it. Don’t pull the “I hate running” or the “I have a bad back and can’t lift weights” excuse. Everyone can do something to improve their physical fitness. You know, and I know, that we should dedicate at least 30 minutes of our day to some type of activity (no going to the fridge to grab a popsicle doesn’t count as an activity). When’s the last time you broke a sweat? I hope it wasn’t when you were trying to squeeze in to a pair of jeans you use to wear 6 months ago. It takes discipline to get healthy, just as it takes discipline to get out of debt.

These are just a few of the areas of my life that I want to make a conscientious daily investment in. These returns will far exceed those of my 401k and Roth IRA. Where are you investing your time? What are some important things that you have let get away from you? What are you gonna do to better your quality of life?