A few weeks ago, I received an angry email from a casual reader, complaining that too many articles were about people with $1 million or more. Most Americans don’t have that amount, he said.
He wants to achieve “FIRE”, that is to say “financial independence, retire early”. But so far, he’s accumulated a 401(k) of just $42,000. But, he adds, he has debts. He owes $8,000 on his credit cards, mostly because of a “misfortune” involving car problems, he says. He has another loan of $8,000. He and his wife owe $8,000 and $4,500 on their car loan. Oh, and he has $12,500 in student debt.
“Am I screwed?” he asked in a Reddit subforum.
In his situation, he should worry less about “retiring early” and more about being able to retire normally, according to Sandra Gilpatrick, a wealth manager in Boston. “FIRE is a difficult strategy for many people, especially those with debt, children and too little income to maximize retirement plan contributions,” she said.
HugglesGamer, it seems, has all three.
“My advice would be to focus more on building an appropriate cash reserve rather than worrying about a FIRE,” Gilpatrick said. “It would give him the resilience he lacks in the face of unexpected expenses,” such as his car problems, she added.
In the meantime, what about his savings?
His 401(k) balance of $42,000 may not seem like much — and it’s certainly not something that puts him on the right path toward financial independence or early retirement. But even this small amount is above the average for his age group.
Among people ages 25 to 34 with 401(k), the median balance is just under $11,400, according to Vanguard data. For those aged 35 to 44, it’s around $28,300. This gives you an idea of the mountain most people have to climb.
Unfortunately, when you add them up, HugglesGamer’s debts — not including his mortgage — come to $41,000, just $1,000 less than his 401(k) balance. The reality is even worse than that, because 401(k) money, unless it’s in a Roth, will also have an implicit tax liability – because even when you’re old enough to withdraw the money without penalty . you still have to pay tax on this income.
He should talk to his 401(k) administrator to see if they allow loans. He may be able to borrow up to 50% of the balance, or $21,000, and use it to pay off any high-interest loans. Yes, you then have to repay the loan to your 401(k), with interest, but this has two advantages. The first is that you pay yourself interest. The second is that payments are usually automatically deducted from your salary, making them forced savings. (He should take advice before taking out the loan. Additionally, this loan carries tax and penalty risks if not repaid on time.)
The good news is he has plenty of time. If you start at age 34 with $1,000, add just $5,000 per year and get an average compound return of 5% per year after inflation, which is the historical average for stocks, you end up at age 65 with a just under $360,000 (in today’s dollars). ).
If you manage to contribute $10,000 a year, you’ll end up with over $700,000, still in today’s dollars. That’s way ahead of most people.
At this rate, you can’t retire early, but you can retire normally. By the time this man reaches his sixties, that may be an aspiration in itself. The median 401(k) balance for people over age 55 is just $70,000.
When you’re saving for retirement, time is magical. Small, regular investments made over a long period of time will produce results. If you can’t get rich, start early.
Meanwhile, a lot of this guy’s financial problems were caused by one thing, or rather two things: the family’s two cars. He and his wife have $12,500 in car loans combined. And he says credit card debt is also mostly due to car problems. In other words, his cars alone account for more than $20,000 of his debts, half the total (not counting the mortgage) and half the value of his 401(k). The guy basically blew half his retirement plan on his cars.
And that’s just the debt accumulated by these two vehicles. What are the operating costs?
AAA estimates that the annual cost of car ownership now stands at just over $12,000 per year. But that’s for a new car and includes about $4,500 per year of purchase price depreciation. If you buy a used car, your depreciation will be much less than that. But other operating costs, including fuel, insurance, maintenance, etc., still come to $7,500 according to AAA.
For a family with two cars, that’s $15,000 a year.
“This guy should have a car that costs less to maintain,” suggests Gilpatrick. “Besides, do they really need two cars? »
Whenever people tell me that city real estate is too expensive, I point out that if you live downtown, you can save on car costs, especially in the age of online shopping and Uber .
At a mortgage rate of 5.5%, that $15,000 per year would be enough to pay the interest on a $270,000 loan.
During the pandemic, when rates fell to 2.5%, saving $15,000 was enough to pay the interest on a $600,000 loan. Still, people were lining up to leave the city. Go figure.
In HugglesGamer’s case, the $20,500 in debt he and his wife have racked up on their two cars, on top of everything else they spend on them, suggests an obvious way to cut costs, reduce debt and to get ahead on the eight balls. .
And considering how much so many people spend on cars, he’s far from alone. If anything, it probably sits in the middle of the mainstream.
2023-09-23 02:33:25
#married #kids #wasted #401k #cars #CNET
