What Will Your Retirement Look Like?
When you decide to retire, will you be able to enjoy life in a nice home or will you only be able to afford a run-down shack?
The best time to start a savings plan is when you start your first job. That way you can save a little, but you have plenty of time on your side to grow your savings with the help of compound interest.
I recently read the book, The Capitalist Code: It Can Save Your Life and Make You Very Rich!, by Ben Stein. In the book, Stein explains how the “wonderful system of stock market capitalism can allow any American to build financial security.”
We often hear about investing in the stock market, but there are so many stocks to choose from and finding a financial planner to help you as you begin your journey is out of the question.
Milton Friedman, a famous economist, who won the Nobel prize for his lifetime consumption model, wrote that as a basic tenet of life, “many of us will tend to spend all of what we earn, therefore, many of us will not have enough money for a comfortable retirement.”
How do we get to the point where we spend less than we earn?
We work.
Stein says, “We get the maximum amount of education we possibly can. We get the taxpayers and the donors to the schools we attend to pick up as much of the tab as possible, by using grants, loans and fellowships to help pay for college and graduate school.”
Of course, there are many ways to earn money. But in general, college grads earn about double what a high school grad makes.
High school dropouts are in even more trouble.
College grads who go on to professional schools will earn far more than the usual liberal arts college grad.
Fields of study that involve the creation of things or processes that make money will produce a greater income than study areas that may be interesting and timely but are not lucrative.
In general, degrees in computer engineering are worth far more than degrees in Austrian history.
A new study based on longitudinal data confirms a college degree provides an advantage in lifetime earnings, but a related decision once students make it to college could prove to be even more crucial.
"That means the decision for whether you go to college versus what kind of major you want to study, the latter decision is more important for your lifetime earnings," said Chang Hwan Kim, associate professor of sociology and the study's lead author.
The full list of majors, divided by gender:
Estimated net lifetime earnings by field of study:
Men
1. Medicine or dentistry graduate degree - $5.25 million
2. Business graduate degree - $2.91 million
3. Law graduate degree - $2.9 million
4. STEM graduate degree - $2.82 million
5. STEM bachelor's degree – $2.66 million
6. Business bachelor's degree - $2.26 million
7. Health science bachelor's degree - $2.11 million
8. Social science graduate degree - $1.98 million
9. Liberal arts/humanities bachelor's degree - $1.88 million
10. Social science bachelor's degree - $1.86 million
11. Education master's degree - $1.86 million
12. Liberal arts/humanities master's degree - $1.81 million
13. Education bachelor's degree - $1.53 million
14. High school graduate - $1.49 million
Women
1. Medicine or dentistry graduate degree - $2.12 million
2. Business graduate degree - $1.89 million
3. Law graduate degree - $1.77 million
4. STEM bachelor's degree - $1.76 million
5. STEM graduate degree – $1.74 million
6. Education graduate degree - $1.5 million
7. Health science bachelor's degree - $1.44 million
8. Social science graduate degree - $1.39 million
9. Business bachelor's degree - $1.38 million
10. Liberal arts/humanities master's degree - $1.19 million
11. Social science bachelor's degree - $1.05 million
12. Education bachelor's degree - $1 million
13. Liberal arts/humanities bachelor's degree - $0.98 million
14. High school graduate - $0.73 million.
All you need is a plan. Warren E. Buffet, has said, “An idiot with a plan can beat a genius without a plan.”
Part of your plan needs to begin with a way for you to make the money to invest.
You don’t want to work in a job, just to be working, but one which you love and can make a definite contribution and earn enough money to save.
Making sure that you are earning enough to save. Investor, Phil DeMuth says, “It’s not about spending so you have something left over to save. It’s about saving first and then allowing yourself to spend.”
This takes discipline.
“You cannot live like a rising executive at Goldman Sachs if you are working as a librarian at your county library for the homeless.”
But whether you are working at the library or the investment firm, you must arrange your life so that you are spending less than you earn.
This is vital.
“The most powerful tax tool for you is the one which made Warren Buffett and many others terrible rich: converting short-term taxable income into long-term, very highly tax-advantaged capital gains income.”
“This means that you buy and hold common stocks in a large variety of public corporations in the United States of America and hold onto them until you retire and need the income they provide by selling them.”
“Here’s how this works: If you buy stock in a successful corporation – and the ones that are large and have been around for a while are almost all successful – you buy a claim on the dividends that these corporations pay out year by year, quarter by quarter.
Those dividends are taxable.
But, if you have stock of the typical large corporation, the corporation will pay only a small fraction of the corporation’s income in dividends. It reinvests the rest in machinery, or factories, or minerals, or leases, or anything it wishes to buy. In a very general way, this adds to the book value of the corporation. The book value is made up of the assets of the company.
This book value grows inside the corporation and is not taxed.
The huge advantage of stocks is that they have perfect liquidity. Their owners can convert them to cash in less than a minute when they need the money.
Your investment in common stocks tends to grow, tax deferred, for as long as you own the stock. There are exceptions and long dismal periods. But over long time, book value grows and the stock price grows.
How do you do this?
All you have to do is buy and hold an “index” of all the largest stocks in the United States of America and hold onto them and add to them regularly. If possible, you should add a steadily increasing amount each month or quarter.
You can just go to a Merrill Lynch or a Vanguard or an Oppenheimer or a Fidelity and tell the woman at the desk that you want to open an account that holds as its primary asset an index fund (or exchange traded fund, which is similar).
The index fund will hold all five hundred stocks in the Standard & Poor’s 500 Industrial Stock Index. You don’t ever have to trade. You don’t have to check the prices hour by hour or even year by year. You just buy the index and hold onto it and add money to it.
The amazing truth is that people who manage money and who pick stocks for investment vehicles, are beaten in performancy by the plain-old indexes about 80 percent of the time.
Warren E. Buffett has said, “My preferred holding period is forever.”
Let your corporate income compound without tax inside the corporation, then pay the capital gains rate on it when you sell.
