I Will Not Ignore My Dire Financial Situation in 2012
Jan 9th 2012 11:56AM
Updated Jan 9th 2012 11:58AM
Just after Christmas, I received a glossy color brochure from The Motley Fool's 401(k) plan provider that included two ominous signs. One was a stop sign and the other was a danger sign. And in italics below the signs was the message, "You may not have enough money to retire when you reach the age of 65."
Sadly, my plan provider was absolutely right. And they didn't know the half of it. Not only am I behind in saving for my retirement, but I have two kids to put through college as well. In a nutshell, I have a long-term funding shortfall that is likely to get much, much bigger... unless I make some dramatic changes.
Truth and consequences
So how did I get into this jam? And how do I get out of it?
The first question is easy to answer. During the course of my career, I haven't been putting enough money away for retirement and my children's college educations. Throughout much of my twenties and thirties, I was either teaching or in graduate school, and I just wasn't able to save the necessary funds. More recently, I've done a little bit better, but I still haven't saved anywhere near enough.
At my current rate of saving, my 401(k) balance will only amount to about 55% of what I'll need to fund my retirement. That number assumes that I'd require 80% of my current income after age 65. Coming up with money for college educations is equally daunting. My 13-year-old son is interested in attending either UCLA or Columbia University at the moment. One year at the former right now, including tuition as well as room and board, costs $31,544 for residents and $54,422 for non-residents. A year at Columbia goes for $59,208. So when my son goes to college in five years, the total cost of his education will be anywhere from approximately $150,000 to $300,000 depending on the school he decides to attend. And once he graduates, my daughter will be entering college three years later.
Pass the smelling salts, please
So what can I do in the face of these formidable challenges? To begin with, it's important that I change my mind-set. Clearly, there's a problem here, and now is the time to start fixing it. Second, I need a plan. Here are a few changes that I intend to make in 2012.
First, I will increase the amount that I contribute toward my 401(k) plan. If I increase my current contribution from 6% to 8%, The Motley Fool will continue to match half of the total. That's free money that I've been leaving on the table, so I'll do that right away. Just that small change alone will mean that our retirement account balance will be considerably closer to what we'll need to support ourselves. I also hope to work well into my 70s so that will make the task even easier.
Second, I intend to refinance the mortgage on our home. In fact we've already reached out to someone who can provide us with a considerable reduction in our monthly mortgage payment. Mortgage rates are at near or record lows at the moment according to a recent survey by Freddie Mac, so now is an excellent time to refinance.
Third, I plan to put the monthly savings from the refinancing into a special account that I've already set up for my children's college educations. I strongly believe that investing in stocks is the best way to build wealth, so I'm confident that I can really make some headway by making this important change.
Right now, the college account is invested in three outstanding long-term businesses that I believe will outperform the market in the future: Google (NAS: GOOG) , Apple (NAS: AAPL) , and Boston Beer (NAS: SAM) .
I chose Google because I believe that it will continue to dominate search, while also offering possible breakthroughs in other areas like automated cars. Apple is another truly excellent company, whose dominance in tablets and phones is unlikely to be overtaken anytime soon. And Boston Beer is the type of company that Fools love -- it's outstanding at both producing and selling its main product. I love the prospects of these three companies over the next five to 10 years, and will continue to purchase similar companies within the college account as I add more capital each month.
The most important change of all
I'm excited about my new plan and have already started to put it into motion. The key to success, however, will be to make sure that I change my entire outlook from this point onwards. In order to save for the long term, I will need to think long term. That's the single biggest thing I need to change about my approach to managing my personal finances.
One of the businesses that I admire the most right now is Amazon.com (NAS: AMZN) , and a lot of its success has resulted from its long-term strategy. In a recent interview with Wired, Amazon's CEO Jeff Bezos said, "Just by lengthening the time horizon, you can engage in endeavors that you could never otherwise pursue." He added, "We're willing to plant seeds, let them grow -- and we're very stubborn."
That is wise advice, and I will not ignore it in 2012 and beyond. Over the next 25 years, I intend to save and invest more, so I can successfully meet my financial goals. If you'd like to join me on this long-term mission, we've put together a free report: "The Shocking Can't-Miss Truth About Your Retirement." Inside, you'll receive some expert advice on how to regain control of your financial future. You can get your free copy right now by clicking here.
At the time this article was published John Reeves owns shares of Google, Apple, and Boston Beer. You follow him on Twitter: @TMFBane.The Motley Fool owns shares of Boston Beer, Apple, Amazon.com, and Google. Motley Fool newsletter services have recommended buying shares of Apple, Amazon.com, Boston Beer, and Google, as well as creating a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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