Invest 15% for Long-term Success

Last week, I started talking about investing! Here is the main goal:  If you put 15% of your income away for 25 years, at a conservative 8% average rate of return, you will have enough money in your retirement account to live off of the interest without ever touching the principle. 

If you’re 50 and haven’t started saving, the 25 year number may have just made your stomach sink. If you don’t want to work until 75, then you’ll need to increase your contributions, but only after you have a full tank and have completed all 8 marks on your Fuel Gauge. At this point, you’ll begin talking with a financial advisor or running calculations on your own on how much extra you’ll need to put in your retirement account to get your retirement savings back on track. 

If you have 25 years or more, this principle is pretty sound. Put away 15% of your take home pay into a ROTH 401k and you’ll have a fully funded retirement account in 25 years. 

People often confuse the TYPE of retirement account and what INVESTMENTS are within the retirement account. Just because I say “retirement account” doesn’t mean that your retirement savings have to be in a risky mutual fund or in conservative bonds. The TYPE of account we recommend is a ROTH 401k, but inside of that account, you can choose how you would like to invest those funds. Your 401k administrator should be able to give you the whole gambit of investment options within your 401k plan. We recommend that you discuss your investment options and risk tolerance with them when choosing your investments. Remember, we’re not looking to make massive gains by picking a winning stock. Those moves often also come with large downsides. We’re looking for consistent returns over time as we save for retirement. 

In 2008, Warren Buffet famously challenged hedge fund managers to a $1,000,000 bet. He said that he would invest $1,000,000 in the S&P 500 and they could invest the same amount of money as creatively as they wanted. In the end, his investment in the S&P 500 beat the best efforts of highly paid hedge fund managers. It is our position that if you have time, the best value for your retirement funds is going to be in purchasing the S&P 500, or a fund that mirrors the S&P 500. The S&P 500 is simply an average performance of the top 500 companies in the United States. When people refer to how the stock market is doing, most often, they’re referring to how the S&P 500 is doing. You can try to out pace the average of the top 500 companies, but through personal experience and through the experiment from Warren Buffet, just purchasing the S&P 500 has proven to be a wise choice for long term investing. But again, as always, talk with your 401k administrator or financial advisor before making changes in your investment portfolio inside of your ROTH 40lk. 

Here’s what matters: Once you have paid off your consumer debt, it is time to begin putting money away for the future. 15% of your take home pay is the magic number. Do it for 25 years and you’ll be able to comfortably retire on your own terms.After you have paid off your consumer debt, meaning all debt outside of your mortgage, cars, and student loans, it’s time to begin investing for retirement. Up to this point, you may have already been contributing 3-5% of your income into your retirement account in order to get your employer match. If that’s you, fantastic! I actually recommend getting 100% of your employer’s match even from step one on your Fuel Gauge. Though pausing your 3-5% contribution could speed up the pace at which you save and pay off your consumer debt, it doesn’t make sense for you to miss out on a 100% return on your money. There are very few places in your life where you can put in one dollar and get out 2. In an employee match program, you often are able to double your money by taking advantage of this employment perk. So if your employer offers a program and you are not on step 6, no worries. Take advantage of the match and once you’ve completed step 5 of paying off your consumer debt, you can begin to crank up your contribution above the employee match. Because now, on step 6, our target is to invest 15% of our income in a retirement account. 

There is likely to come a day when you won’t be able to work and receive a wage for your service. We call it retirement and this is the point when you stop working and begin doing the things you love, like playing golf or pickleball, walking barefoot on the beach, and everything else they promise in Medicare supplement advertisements. There is a sense that one is supposed to work hard and put their time in SO THAT they can stop working and begin to enjoy their life. When many people retire, not only do they quit their day job, but oftentimes, they quit pursuing their purposes, seeing that their prime is over. Florida is overrun with retirees, many of whom have moved there just to enjoy their retirement in peace. There is nothing wrong with enjoying life, but enjoyment should never supersede our purposes here on earth. 

There’s a story in the Bible found in Genesis 41. God gives Joseph the extremely important task of planning for the future. God gave Joseph the interpretation of Pharoah’s dreams of the 7 good years and the 7 bad years to come. God’s command to him was to store away a portion of all of the land’s produce during the years of plenty so that when the years of drought came, they had sufficient resources to live. God shows us in this story that planning for the future is wise, but along the way, our trust should still be in God. I believe we are called to store up treasures in Heaven while still planning for our future here on Earth. 

Part of laying a healthy foundation is saving 15% of your income for the future. This money is not to be used for creating another stream of income for you right now. This money is not to be dipped into when you need a little extra for that special vacation. This money is not your savings account for a rainy day. This money, this 15% of your take home pay, is for your retirement, the years when you are no longer earning an income, or at least not much of one. 

By being disciplined, the power of compound interest will do its job while you’re working. If you put 15% of your income away for 25 years, at a conservative 8% average rate of return, you will have enough money in your retirement account to live off of the interest without ever touching the principle. 

I may have just lost some of you in those numbers, so let me explain how I came to that conclusion. The best retirement account is a ROTH 401k. This retirement account, offered through most employers in the United States, allows you to put away the most amount of money in a government tax advantage retirement account. Inside of a ROTH 401k, just like inside of a traditional ROTH account, you pay taxes on the money you put in, but you don’t pay any taxes on the interest you earn over the years. Here’s what this means in plan English: If you put 15% of your take home pay into a ROTH 401k, you’ll have a fully funded, tax free retirement within 25 years. 

Next week, we will dive into this a little deeper and discuss what to do if you don’t have a 25 year horizon. 

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Zach Santmier is the owner of Trumble Agency, Inc. and the author of the personal financial course, Increase. He focuses on helping families escape paycheck to paycheck living so they can freely pursue their ideal future.