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Financial Advice for Young People Just Starting Out

Congratulations – You graduated from college and landed your first job. Unfortunately, the party ends shortly after that. According to Zillow, 22.5% of millennials ages 24-36 live at home (roughly 12 million). And of those “Boomeranger”, only 12.5% are unemployed, indicating that the majority choose to stay home for one reason or another. The cause of this could be a number of reasons such as rising costs or low wages. Not to mention crushing debt from student loans and credit cards.

For people just getting out of school and starting to establish themselves, here are six important concepts to keep in mind:

1. Automate your savings: Set realistic goals. Starting small with automated savings is a good place to start, in that case, you won’t feel strapped for cash and it’s much less painful. For example $5 a week. Once you get more comfortable with saving money increase it in smaller increments. Use any number of tools that will do it automatically for you. So you can “save-and-forget”. Over time, you can slowly raise the amount. Starting early and being consistent can have huge implications later in life.

2. Design a budget: Learn from your college years. When it came down to entertainment purchases or gas for your car, it was an easy choice. But now, life is more complicated. You have to save for big expenses (like replacing a car in a few years), paying down debts, and saving for retirement (which seems absurdly far away for a recent grad to consider). The solution is a budget. Start by paying yourself first. By that, I mean save for your future (retirement and major expenses). Then, budget out your most essential day-to-day expenses. Whatever is left can be spent on discretionary expenses (eating out, having fun, etc).

3. Search for less expensive alternatives: Building on the budget concept, there are simple ways to cut costs. Maybe there is a gym in the area $10 less per month, those savings can add up quickly. Review your subscriptions, search for alternatives and calculate the potential savings. Subscriptions have grown in popularity over the last ten years. You’d be surprised how much you can save by eliminating a few subscriptions or finding a cheaper option.

4. Beware of ‘Advertiming’: You’ve just reached a major milestone in your life, and brands also realize that. In fact, they’ve gotten pretty smart. Advertiming is a strategy used in advertising to run adverts to a specific audience at a specific time, (i.e Dunkin Donuts ads during the morning rush hour, AARP magazine in the mail when you turn 50). Audi offers a “College Graduate Offer” for recent grads, they’re trying to hook you early.

5. Don’t buy a brand new car after landing your first job: JD Power discovered that 29% of new vehicles are bought by Millennials. Recent grads might be experiencing the income effect. Imagine going from a college student budget and meal plans to a salary, you feel a whole new level of freedom. It’s important to recognize that the income effect is just an emotional reaction to a major increase in cash flow. You’re not used to it yet.

Kelley Blue Book’s most recent figure for the average price of a new car is $35,285. If the average depreciation of a car is 20% after the first year you should rethink your options. The need for a reliable car could be validated, but that could also be $7,057 towards paying off lingering debt. Instead look for a New-Used car.

6. Ease off the social media: Recent data from Forbes suggests 72% of Millennials have made fashion and beauty purchases influenced from Instagram posts alone. Could the social influence be thinning their wallets? At the very least, it’s important to keep in mind how deeply the consumer culture has worked its way into apps we use every day (like Facebook and Instagram)

Like generations before them, millennials attempt to leave the nest while burdened with rising costs of living, peer pressures and debt. Brands are getting smarter with targeting them at a time when they’re not financially secure to pursue their expensive tastes. Needs for short-term appear more important than the long-term. In essence, it comes down to needs vs. wants. The ability to distinguish between the two is a simple, timeless concept, yet so often overlooked.

Budget, plan, ignore the noise and most importantly, prioritize.

Special thanks to Dan Varghese, our current intern for researching this post.

How To Retire Early: A Critique of A Widely Shared Article

Recently, an article has been floating around the internet that presented a simple strategy to retire early.  It seemed too good to be true.  The gist of it is  “Even by simply upping your savings rate from 10% to 20%, you could shave off over 14 years from your retirement timetable.”  But what really caught my eye was the a simple chart that accompanied the quote suggesting the more aggressive you saved, the earlier you could retire:

If interested, you can read the full article here.

I couldn’t find enough details on how these figures were determined.  There was no complete list of assumptions used to arrive at these calculations.  Was Social Security factored into these calculations?  What about inflation? How did they define success?  I decided to do my own analysis and critique the findings on either end of the chart.


Save 10% for 51 Years

For the analysis that follows, I assume a 21 year old saves about $10k a year (10% of a $100k income) and does so for 51 years. And then in retirement, he would live off $100k. Social Security is not factored into this equation.  When we model this scenario, the results are very underwhelming.

The Result:

This scenario is not promising.  There is an extremely high chance that the portfolio would last for only about 12 years in retirement.  When we run through a 1000 market simulations, only 9% of the time will the portfolio last until age 95.

A Modification to Consider:

Let’s add social security to see how this affects the probability. Assuming social security of $30k per year, we can see that probability has jumped from 9% to 74%.  That means that in 74% of the 1000 market simulations, the portfolio lasted at least until age 95.  By leaning on social security to partially fund retirement, the investor doesn’t have to take as much from his savings.

We are getting closer to success, but I would not be comfortable with this plan.  I want to see a confidence level in the 90% range.  To get to a confidence level that I would feel comfortable with, I see three options to consider doing in addition to factoring in social security:

  • Increase savings to $1000/mo
  • Retire three years later
  • Live off $1000/mo less in retirements.

An Even Better Approach:

Let’s go back to our original scenario (without factoring in social security).  Let’s assume that the investor would increase the amount he saved each year by the rate of inflation.  In year one, he saves $10,000, but by year 5 he is saving $10,510.  Now this produces an interesting result:

That small change of saving a little more than the previous year had a profound impact when spread over five decades.  And the best part is that social security is icing on the cake.


With modifying the assumptions a little bit, this scenario is very realistic.  This closely matches a lot of rules of thumb out there, so I’m not surprised that this scenario is workable.

Save 70% for Nine Years:

Let’s move to the other end of the spectrum and see how we can make the more aggressive goal possible.  Here is a hint: it’s a real stretch.

The obvious issue:  A client earning $100k per year would save $70k in this scenario leaving $30k for taxes and living expenses. That’s simply not enough to live on and pay taxes upon.  Under normal circumstances, I’d stop right there in my analysis. But to make this scenario at least plausible, let’s assume that he works for a company that provides food and that he camps in the parking lot.  You may be laughing, but it does happen. Basically, he has no living expenses and that $30k is used to pay taxes.


If we take the same client situation as we outlined in the previous example and accelerate retirement to begin in 9 years, the client has absolutely no chance of having the portfolio last through our planned life expectancy of age 95.  I’d be happy if the portfolio lasted for 10 years.


A Modification to Consider:

To make this scenario even remotely possible, the investor would need to slash his retirement income to about $1900 per month if he wants to have a good probability of retiring in 9 years and living off his portfolio until age 95.


We may find it comical to consider the premise of only working for 9 years and saving the rest, but if this hypothetical person had an extremely modest lifestyle, this modified scenario could be considered.  The author of the chart referenced at the beginning of this post is a proponent of these kinds of retirement strategies and has even retired early himself.  His blog captures his thoughts and strategies and a few months back, I even wrote about this growing extreme retirement trend.


Effects of Saving an Extra $20 Each Week

Saving just a little bit extra each year can have a profound impact over the long term.  Investor’s Business Daily ran some pretty interesting numbers showing the impact on one’s retirement if an extra $20 is saved every week.  Here is some of the findings based on certain age ranges:

Recent College Grad: invest $20/wk earning 6% and by retirement, that pot of money will be about $330,000.

Someone in their mid-40s:  invest $20/wk earning 6% and by retirement, that pot of money will be about $40,000.

Someone in their mid-50s:  invest $20/wk earning 6% and by retirement, that pot of money will be about $14,000.

The results are pretty clear – consistently investing over many decades can have exponential benefits on your financial situation.  Even small amounts can add up to have a big impact when time is on your side.



The New Retirement Dream

About 15 years ago, the common retirement dream was to retire early.  It wasn’t uncommon for people in the their late 50s to pull the trigger and retire.  But that trend has been waning over the years.  More and more, we are seeing clients opt to work later in life.  Some find passion jobs that they truly enjoy, such as working for a non profit that supports a cause that they hold dear.  Others become successful entrepreneurs.  Still others, keep their existing job but retool it to better suite themselves, such as working part time or do job-sharing.

It turns out, that our own observations are reflective of several polls and surveys that have been released.  Here are some interesting findings:

  • 3 out of 4 Americans plan to work beyond traditional retirement age
  • 40% of respondents said they plan to retire after age 65
  • 44% of respondents said they would work part-time because they want to (up from 34% in 2013)

If you’re interested in reading more about this growing trend, this article is very interesting.

The Best Stocks To Invest In Right Now

How many times have you seen that headline? How many times did it spur you to read an article and even take action? Well respected publications are famous for putting together these kinds of lists. The odd part is that every month, week, or even day that list changes. This morning I saw headlines like these “ The Best Value Plays of 2017”, “These Stocks are Poised to Grow”, “These Stocks Will Surge With Trump”.

This is part of the Fake News problem we’re dealing with. Editors and journalists know that those headlines are going to generate the clicks and your attention. They want your attention long enough for you to see the ads and don’t care at all if those investment ideas are good.

Publications and the media are in the business of selling ad space. Any recommendations should be taken with a grain salt.