The other day my annual dose of reality arrived in the mail – my social security statement, sent compliments of the Social Security Administration. In it I found the usual listing of annual wages dating back to my first pizza job at 16 years old. It is comforting to know that if I die my wife and kids will receive a “special one-time death benefit of $255.” Great, that ought to be just enough to pay off the singer at the funeral. Instead of doing the usual file-it-and-forget-it routine I decided to run through a little exercise I read about in Your Money or Your Life.

Not including the $1,300 per year I earned rolling out pizza dough, collecting golf balls, and assembling fast food sandwiches in college, I’ve earned $368,569 over the course of my professional working lifetime. That figure is alarmingly high when I consider how little I have to show for it. I now understand why this is such a sobering exercise. If I had managed to save just half of that figure (after taxes) I should have well over $150,000 socked away in mutual funds, stocks and cash reserves. Suffice it to say, I’m not even close.

What can I learn from this painful exercise? The reality that this much money has slipped through my fingers has me reaching for a bottle of Tums. My entire adult life I have been working and earning and working and earning, and I have basically managed to save none of it. I have this vision of someone trying to collect rain water while stranded on a deserted island. They set up an elaborate bucket system to catch runoff, only to discover after the rain has stopped their bucket has an enormous hole in the bottom. Time to get a new bucket – fortunately there are few more rain clouds left on the horizon.

Ten years from now I plan to be holding a bucket full of mutual funds, stocks, and cash. The patch for my bucket will come from a variety of sources. First, I am using this year to build my knowledge of personal finance by becoming a voracious reader on the subject. By eliminating time-wasting activities such as watching television, or playing video games, I have managed to free up more time for reading books. Second, I plan to continue writing here to express my opinions on the subject of frugal finances. The research, planning and writing I do here, as well as the interaction with my readers and other bloggers, keeps me motivated to stay on track, financially. Finally, I now have a firm grasp on my spending and no longer buy things on a whim. By walking away I have learned to say “no” to myself, something most people with financial problems have yet to learn.

This is the seventh article in Frugal Dad’s week-long series, The 7-Day Turnaround: One Week to Change Your Family’s Financial Destiny. Each day brings a new step to implement and help you get control of your finances.

The word “retirement” has always evoked day dreams of playing out the remainder our lives fishing, golfing and joining a bridge club. However, with improvements in preventive medicines people are living longer, and with a bull market at the end of the last decade, many of those people are “retiring” earlier. Instead of retiring from the work world entirely early retirees are simply hanging up their careers and looking for more fulfilling work, a search for that self-actualization Maslo referred to. That is a noble goal. We spend the majority of our early careers working to pay for things (houses, cars, college for the kids). Why not start saving for an [tag]early retirement[/tag] from your day job so you can then go do something you have always wanted to do, regardless of the pay.

Invest outside of retirement accounts. We’ve already learned the virtues of investing inside retirement accounts, but in this final step let’s start to invest outside of retirement accounts so that money is available to tap before 59 1/2, the current minimum age to withdraw from an IRA. This step requires closer scrutiny of investment options than investing inside retirement accounts. For one thing, your time horizon is shorter so you have less time to recover from making a bad investment selection. You also have less time to recover from a market downturn, so riskier investments are usually off the table for this type of investment. Capital preservation is nearly as important as capital appreciation in this step.

Don’t forget about taxes. Since these investments are outside a tax-deferred, or tax-free retirement account you have to be more conscious of the tax implications. Consider investing in a more conservative mix of index mutual funds with a low turnover to [tag]minimize taxes[/tag]. Vanguard’sTotal Stock Market Index Fund and 500 Index Fund are good examples of low-cost mutual funds with low turnover. With interest rates hovering near record lows, high-interest savings accounts are not as attractive an option as in times of higher rates. Still, keeping a portion of your “early retirement” fund in cash may make sense if you can find rates that significantly out-pace [tag]inflation[/tag]. Treasury bonds, high-interest bearing CDs and money market mutual funds offer decent returns with minimal risk, but should only represent a portion of your total early retirement fund in the beginning stages. You need growth on your side up front, and once you’ve earned that growth you can begin to take those profits and preserve them in these safer savings vehicles.

At some crossover point in the future your monthly investment income will match your monthly expenses. At this point the money in your “early retirement” account is generating enough working capital to pay your monthly expenses. You are no longer dependent on earning a wage to provide necessities. This point was best illustrated in the book Your Money or Your Life. Author Joe Dominguez used a graph to plot monthly expenses and monthly investment income. Over the years his investment income grew, and as he practiced frugal living principles his expenses decreased. One day the two figures met. It is at this point that you can finally break away from the daily grind. What is it you’ve always wanted to do, but could never afford to start? Maybe you want to start your own business, or perhaps you would like to volunteer more of your time towards a particular cause. Regardless of your chosen endeavor, you are now free to make the jump without worrying about how much money is involved. With that kind of freedom creativity is released in waves, and you just might find yourself making more money than you made in your working lifetime.

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This is the fifth article in Frugal Dad’s week-long series, The 7-Day Turnaround: One Week to Change Your Family’s Financial Destiny. Each day brings a new step to implement and help you get control of your finances.

Now that you have moved beyond the half-way point in your 7-day turnaround, it’s probably a good time to look back and see what all you have accomplished. After taking an inventory of your finances you established a three-month emergency fund to break the cycle of relying on credit cards. In step three we cut up those credit cards, saving one no-fee, low-interest card for emergencies only. Slashing your monthly, non-utility expenses was a major emphasis in step four, requiring you to think long and hard about trading your hard-earned income for things like gym memberships and cable service. By now you are debt free with a solid emergency fund – it’s time to start saving for your [tag]retirement[/tag].

The first step in planning for your retirement is coming up with your Number. Everbody has a Number, but few of use know what it is. Your Number is the amount of money that will grant you the level of financial independence that allows you to quit working for money. The Number, by Lee Eisenberg, offers many strategies for calculating your Number. It isn’t good enough to say, “I’ll retire when I have a million dollars in the bank.” Determining your Number takes actual planning, determining how much working capital you will need to live off of your [tag]investments[/tag], and estimating your expenses in your golden years.

Take advantage of matching funds from employer retirement plans. Most employers offer full time, professional employees the opportunity to invest in an employer-sponsored [tag]401k plan[/tag] (or 403b, if you work for a non-profit or educational institution). Many companies even offer to match employee contributions up to a certain percentage of the employee’s income. This is like free money. Get your retirement savings started by enrolling in the plan and contributing up to the percentage of income the company matches. Don’t worry if it is only 3% of your income, we’ll use your remaining earnings to save in a different savings vehicle.

A Roth IRA is the best retirement savings vehicle around. Some experts argue over whether or not to fully fund a 401k or a [tag]Roth IRA[/tag]. For me, the argument for Roth IRAs is explained beautiful in the following analogy.

Would you rather pay taxes on the seed or the crop?

In other words, would you rather pay taxes on your income now, when it is smaller, or later when you are a millionaire (and you will be if you stick to this plan!). Easy choice. I would rather pay [tag]taxes[/tag] on money now, and invest in a Roth IRA with after-tax dollars. When you withdraw that money in retirement Uncle Sam will let you keep 100% of the contributions and earnings, tax free! Conversely, 401k balances grow tax-deferred, which means you will save a little now diverting pre-tax income to your 401k plan, but you will have to pay more when making large withdrawals in retirement. Remember, the key to any good financial plan is to keep a long-term view. Sacrifice the reduced tax liability now offered by the 401k for a tax free payoff from the Roth IRA years down the road.

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The February edition of Kiplinger’s Personal Finance magazine ran an intriguing cover story, “Six Simple Ways to Retire Rich.” As part of the article Kiplinger’s ran a feature titled “How to Make a Million: Strategies at Every Age.” Most of us are aware of the power of compounding interest, but this feature really drove home the importance of starting early to retire rich.

A 25 year-old with no savings needs to save $286 a month to reach $1 million by age 65. If your new employer offers a matching contribution, participate up to the match and then consider investing above that in a Roth IRA. The forty years of growth will make you a millionaire, maybe many times over depending on investment performance.

A 35 year-old with no savings needs to save $671 a month to have a $1 million nest egg in thirty years. Notice the jump in required monthly contributions? That’s what waiting ten years gets you. At 35 there are several family priorities competing for your money such as [tag]college savings[/tag], housing, etc. However, this is one of those times when you need to exercise the “pay yourself first” plan. No, you aren’t being selfish. You are laying the groundwork for a solid financial future to provide for your family for years to come.

At 45 years-old it takes nearly a mortgage payment, $1698, to generate a $1 million portfolio. With only a twenty year window it’s time to get busy, but it’s not too late to get started. Many people this age develop a loser’s attitude, “It’s too late so why even start. I’ll just live on social security.” Social security insolvency aside, this is not a plan for success at any age. Take responsibility for your inability to save up to this point by making it a top priority over the next two decades.