Even if your retirement is several decades away, saving for it should be a top financial priority today. While you may not see the primary benefits until well down the road, the act of prudently investing your cash for that long term future can benefit you right now.
Sure, the immediate tax deduction from investing in a traditional 401(k), and the tax deferral and long-term tax free nature of a Roth IRA, are nice benefits that help quite a bit in the here and now. But frankly, that's nothing compared to the huge, unexpected near-term benefits that I recently discovered can come from financially preparing for the long-term future.
Saving money kept me employed
Like far too many Americans, I recently lost my (non-Fool-related) day job, for reasons of department demographics, rather than individual performance. I found myself in the unenviable position of trying to find a new position in this ugly job market.
Unfortunately, these days, the competition for available new roles is fierce. One of the first questions my prospective manager asked was why he should hire me rather than one of the several other people applying for the position.
While I'm not completely certain, I strongly suspect that my response -- enabled by a long-term plan of saving for retirement -- put me over the top for the role that I will be starting shortly. To paraphrase:
While we're not rich, we are at the point financially where even if I never worked again, we wouldn't starve. That helps you in two ways. First, it means that I'm not afraid to tell the truth, even if it is bad news. Second, it confirms that I applied for this role because it looks like interesting, meaningful work that adds significant value to the business, not just because I need a job. I can work anywhere and we'd still be ok, but I really want to do the type of work you've got available.
The vast majority of our financial assets are in retirement accounts -- 401(k)s and Roth IRAs. While ultimately targeted for a retirement that's still decades away, if push came to shove, we could tap the money now. Ordinarily, withdrawing money from retirement accounts comes with substantial taxes and penalties for people at our ages, but there are exceptions that would help soften the blow. For instance:
- Distributions of contributions from Roth IRAs are tax- and penalty- free.
- Taking payments of ESOP dividends from 401(k)s would be taxable as ordinary income, but does not carry penalties.
- Medical insurance premiums can be paid from IRA distributions without the 10% penalty.
- Using a method known as a substantially equal period payment plan would enable regular early distributions without penalty.
How we got there
We've squirreled away what we could throughout my career, and during the time my wife worked for money, rather than for hugs and kisses from our kids. While I've certainly made investing mistakes, we've managed to overcome them by focusing most of our money on companies with the following characteristics:
- Decent balance sheets
- Healthy operating cash flows
- Generally growing, generally covered dividends
As a result, our portfolio largely consists of companies like these:
Debt to Equity Ratio
Cash from Operations (in Millions)
Year over Year Dividend Change
Kinder Morgan Energy Partners
Maxim Integrated Products
Source: Capital IQ as of Nov. 15.
With most of these companies sporting debt-to-equity ratios well below 1, they clearly haven't overleveraged their balance sheets to juice the apparent financial returns of weak operations. With real cash from operations, they've proved that their customers will fork over cold, hard cash for these companies' products. And with histories of both paying and growing their dividends, their managers pay more than lip service to the fact that they work for the shareholders, not the other way around.
None of them looks likely to light the world on fire. Nevertheless, they're all companies that we're happy to hold as long as their underlying businesses continue to perform and their valuations stay reasonable. And thanks to their decent balance sheets and shareholder-friendly behavior, we've been able to sleep at night and keep making regular investments, even as both the market and my day job have gotten rocky.
Help yourself today, tomorrow, and in the long-term future
Successfully investing for retirement is not rocket science, and it's certainly not magic. All it really takes is time, a decent investment philosophy, a little bit of money invested regularly, and a long term willingness to commit to regularly funding your plan.
And if your future brings you to the same unfortunate crossroads that mine did, executing against that plan now could either help you as it did me, or at minimum, set you up to better weather the storm that follows.