ALL THE RIGHT MOVES

Matt realizes saving for his future is as easy as pie

MATT JOHNSON HAS JUST GOTTEN started in his life as an investor, but he enjoys telling people that he celebrated like a billionaire on his last birthday.

Matt, thirty-four, lives in Omaha, Nebraska, with his wife, Vivian, and their year-old daughter, Hannah Marie.

For his thirty-third birthday, Vivian decided to take Matt to the Bohemian Cafe, a local restaurant just south of downtown Omaha in the Little Bohemia neighborhood.

That’s when he met legendary investor Warren Buffett.

“It’s not a fancy restaurant by any means, but carries quite a bit of the ethnic flavor of the immigrants that settled in that part of town over one hundred years ago. I’d been wanting to try it for some time,” Matt recalled.

“As the maître d’ showed us to our table, I couldn’t help but notice the ‘Oracle of Omaha’ sitting at a booth right around the corner from ours. It turns out his birthday and mine are one day apart, so he was there celebrating with a few members of his family.”

A billionaire celebrating his birthday in Little Bohemia?

“Having lived in Omaha for a while, I’ve heard stories about Warren Buffett preferring to eat at smaller, locally owned restaurants rather than much fancier and much more expensive places that he could easily afford,” Matt said.

“It was fascinating to see such stories confirmed in real life. I was also quite surprised to see that he didn’t seem to have any security detail with him, either. There were no tough-looking bodyguards escorting him to an armored limo outside the restaurant when we were done eating—just a few family members I guessed were his wife and kids.”

One of those family members took a picture of Matt and Vivian with Buffett, which Matt displays proudly on his website.

One thing Matt didn’t do is ask Buffett for investing advice.

“I’d actually just finished watching a series of videos on YouTube where he explained his strategy of value investing. His advice for people like me, however—people who don’t have time to invest as a full-time career—was just to put money away in index funds on a regular basis, which is what I’ve been doing.”

When I spoke to him, Matt was earning about $50,000 a year as a graphic designer for MOSAIC, a nonprofit that helps people with intellectual disabilities, and doing freelance work on the side. He saves 10 percent of his income in a Roth IRA.

(Matt later e-mailed me to say he and MOSAIC parted ways one week before Christmas in December 2012. He was still freelancing while looking for new full-time work at last check.)

Vivian, thirty-three, worked at a local day program for seniors and people with disabilities before becoming a stay-at-home mom.

Together, they have accumulated $32,000 in four retirement accounts:

Matt is also interested in a little-known federal tax credit, the Saver’s Credit, that encourages people to save for retirement, subject to income limits. Savers get a 10 percent, 20 percent or 50 percent match if they save up to $2,000. Because he’s on the higher end of the income scale, Matt would be eligible for the 10 percent match, or $200.

Is that enough incentive to spur people to save? Sure, Matt says.

“It actually keeps me motivated in the sense that I’d be silly not to save for retirement—it’s like getting an employer match in a 401(k). I would be leaving money on the table if I didn’t take advantage of it.”

Matt’s goal for retirement is to have enough so he can withdraw 4 percent of his money each year and match his current income without depleting his savings. At a salary of $50,000, that would require $1.25 million ($50,000 divided by .04).

He might not be on track for that yet.

“I feel I should be saving more, but I believe if I keep putting away money consistently over time, I’ll be a lot better off than many of my peers, who haven’t saved a dime.”

Young couples with small children are often torn between saving for their child’s education and their own retirement. I’ve long said that retirement should be the first priority, because there are many ways for a child to get through school and only one way for a couple to retire.

Only once you’ve fully funded your own retirement should you begin to put money away for a child in a 529 college savings plan. A 529 plan allows you to save money tax-free and spend it tax-free on qualifying college expenses down the road. (See pages 85–86 in my last book, Living Large in Lean Times, for more on 529 plans.)

“I believe retirement is my top priority as well, since I don’t want my little girl to have to support my wife and me in our old age,” Matt says. “I am still putting a little away in a 529 account now, however, because I still have seventeen years ahead of us to save, and if we’re going to save anything at all [for Hannah Marie], I believe it’s better to do it now rather than later.”

One thing Matt wishes he’d known earlier is how easy it is to open a retirement account.

“The company I worked for didn’t offer any kind of 401(k) or pension plan, and everyone I talked to about opening an IRA was a commissioned broker who made the process sound far too hard to do on my own.”

One adviser suggested maxing out a Roth IRA for the current and previous year, which at that time would have meant a deposit of $6,000. That was too much for Matt to come up with. But after listening to my radio show for a few weeks, he realized opening a Roth was no harder than opening an online bank account.

“I’ve enjoyed learning about index funds and target retirement accounts, which make it very easy to have a well-balanced portfolio with extremely low expenses,” he says.

Matt enjoys investing, but he has other passions too. He has been part of an Omaha-based online comic book community for years. That interest even took him to London to meet with other like-minded comic book fans. Over the years, a comic book collective that he was with had one of their titles selected for Free Comic Book Day. And one of his own comics was even translated into Russian!

He also loves swing dancing, doing vintage moves like the Charleston and the Lindy Hop. And he loves food. On his blog, the Cornstalker’s Journal, he says Omaha is a great place to eat, that Vivian is a great cook, and that they have plenty of friends who know how to cook.

And if he ever becomes a billionaire himself, he can look back and realize that it was his love of a good meal that allowed him to meet the legendary Warren Buffett.

What can you learn from Matt’s story?

File for the Saver’s Credit if you qualify.

  • People come up to me and say, “All that stuff you talk about saving is great . . . for people who make a lot of money. But what about the rest of us?”
  • More than ten years ago, Congress passed the Saver’s Credit with the goal of assisting savers who make a decent living but not a huge income. If you save $2,000 in a 401(k), IRA, 403(b), or 457 plan, the government will match your money with as much as 50 cents on the dollar, up to a maximum of $1,000. Income caps apply—$29,500 for single filers; $44,250 if head of household; and $59,000 if married filing jointly.
  • You won’t automatically get this tax credit if you qualify. You have to ask for it using IRS form 8880. Visit IRS.gov and search keyword “8880” for more details. Full-time students are not eligible for the credit.

Save for retirement before saving for a child’s education.

  • A few years ago, a Country Financial survey revealed that more men than women think saving for a child’s education is of greater importance than funding their own retirement.
  • As parents, we all know it would be great to do everything possible for our kids. But the most important thing you can do is provide good guidance and discipline, plus ensure the feeding and care of your children in a safe, healthy environment.
  • There are no scholarships for retirement. But there are grants, work-study, regular jobs, scholarships, loans, and other ways to pay for college. So your hearts are in the right place, but your heads are not. You’ve got to do the practical thing and save for your future first.

Don’t pay a “professional” to manage your money.

  • If two years ago you put your money in an index fund instead of into individual stock picks, you would have done better 84 percent of the time versus if you had your money actively managed by an “investment guru,” according to data from Standard & Poor’s.
  • The results of the S&P study were back-tested over ten years and guess what? Go back five years and 61 percent of the time you’d do better with an index fund versus actively managed money. Go back the full ten years and again there is a similar finding.
  • I like index funds because they give you wide exposure to capitalism. You can buy little slices and dices of many companies in one index fund. Some of my favorites include the Fidelity Four-in-One Index Fund, the Schwab Total Stock Market Index Fund, and the Vanguard Total Stock Market Index Fund.

Look at exchange-traded funds.

  • Matt is doing great by diversifying in index funds. But he might want to consider adding some exchange-traded funds (ETFs) to his portfolio. ETFs are becoming fantastic for individual investors since Charles Schwab, Fidelity, Scottrade, TD Ameritrade, and Vanguard started offering them without any buy/sell commissions.
  • ETFs are bought and sold just like stocks. They typically have a better tax treatment than a mutual fund, plus lower management fees. So while the typical mutual fund might have annual management fees of 1.5 percent, you can buy ETFs with annual management fees of less than .10 percent.
  • My favorite starting point is the Schwab Total Stock Market Index ETF, which charges only 0.04 percent per year.
  • Let’s say, unlike Matt, you’re the kind of investor who hires a professional to handle your money, and maybe you pay 1 percent in management fees, plus the expense of the actual investments. Well, now it could actually be cheaper to hire a brainiac to manage ETFs for you than it would be to pay for mutual funds that you pick yourself!